Voluntary tax payment before show cause notice defeats penalty for suppression, while appropriation of the deposited tax was upheld.

Penalty under Section 78 of the Finance Act, 1994 was unsustainable because the tax liability had been voluntarily discharged before the show cause notice and the record did not establish suppression of facts; the penalty was therefore set aside. The deposited service tax amount was validly appropriated towards the confirmed demand because the payment represented discharge of the liability, so that adjustment was upheld.

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Issues: (i) Whether penalty under Section 78 of the Finance Act, 1994 was leviable when the tax liability had been voluntarily discharged before issuance of the show cause notice and the element of suppression was disputed; (ii) Whether appropriation of the deposited service tax amount towards the confirmed demand was sustainable.

Issue (i): Whether penalty under Section 78 of the Finance Act, 1994 was leviable when the tax liability had been voluntarily discharged before issuance of the show cause notice and the element of suppression was disputed.

Analysis: The deposit of the tax amount was made before the show cause notice was issued. The record also showed that the appellant had consistently taken the stand that no tax was payable on the receipts in question and that the omission was not deliberate. In these circumstances, the ingredients necessary to sustain a finding of suppression were not made out, and the basis for invoking penal liability was not established.

Conclusion: The penalty under Section 78 was not sustainable and was set aside.

Issue (ii): Whether appropriation of the deposited service tax amount towards the confirmed demand was sustainable.

Analysis: The amount deposited by the appellant represented discharge of the tax liability arising from the services in question. Since the liability itself stood discharged by payment, there was no infirmity in crediting that amount to the Government account against the demand.

Conclusion: The appropriation of the deposited amount was upheld.

Final Conclusion: The appeal succeeded only to the extent of setting aside the penalty, while the adjustment of the deposited tax against the demand remained undisturbed, resulting in only partial relief to the appellant.

Ratio Decidendi: Penalty under Section 78 of the Finance Act, 1994 cannot be sustained where the tax liability is voluntarily discharged before issuance of the show cause notice and the record does not establish suppression of facts.

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