Penalty relief under service tax law where pre-adjudication payment and bona fide exemption belief showed reasonable cause.

Penalties under Sections 76 and 78 of the Finance Act were held not leviable where service tax and interest had been paid before adjudication and the assessee showed reasonable cause under Section 80. The assessee's bona fide belief, based on Notification No. 25/2004-ST and its understanding that the activity was job work not subject to tax for the relevant period, meant wilful suppression or intent to evade was not established. On that basis, Section 80 operated to bar penalty and the penalties were set aside.

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Issues: Whether penalties under Sections 76 and 78 of the Finance Act were leviable when the assessee paid the service tax and interest before adjudication and claimed reasonable cause under Section 80 on the basis of a bona fide belief arising from the exemption notification.

Analysis: The dispute was confined to penalty. The assessee had taken the stand that it was doing job work and believed, in view of Notification No. 25/2004-ST, that it was not liable for the period in question. The taxable amount ultimately confirmed had already been deposited with interest before the adjudication order. On these facts, the requisite element of wilful suppression or intent to evade tax was not established. Section 80 barred penalty where reasonable cause for the failure was shown, and the record supported such cause through the assessee's bona fide understanding of the applicable exemption and subsequent compliance.

Conclusion: Penalties under Sections 76 and 78 were rightly set aside and the assessee succeeded on the penalty issue.

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