Pre-notice payment of service tax and interest bars penalty where bona fide belief and no intent to evade are shown.

Service tax and interest paid before issuance of the show cause notice attracted the protection of section 73(3) of the Finance Act, 1994, because the liability had been voluntarily discharged during investigation before notice. On the facts, bona fide belief and absence of intent to evade tax meant that penalties under sections 76, 77 and 78 were not warranted, while the interest liability itself remained payable. The stated ratio is that pre-notice payment of tax and interest, coupled with no intention to evade, bars notice for the amount paid and defeats penalty exposure.

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Issues: (i) Whether payment of service tax with interest before issuance of the show cause notice attracted the protection under section 73(3) of the Finance Act, 1994. (ii) Whether penalties under sections 76, 77 and 78 of the Finance Act, 1994 were sustainable in the absence of intention to evade tax and in the presence of bona fide belief.

Issue (i): Whether payment of service tax with interest before issuance of the show cause notice attracted the protection under section 73(3) of the Finance Act, 1994.

Analysis: The tax liability was not disputed, but the record showed that the service tax along with interest had been paid during investigation and before the show cause notice. On those facts, the statutory protection under section 73(3) was attracted, since the amount had been voluntarily discharged before notice.

Conclusion: The payment made before notice brought the case within section 73(3) of the Finance Act, 1994.

Issue (ii): Whether penalties under sections 76, 77 and 78 of the Finance Act, 1994 were sustainable in the absence of intention to evade tax and in the presence of bona fide belief.

Analysis: The materials showed bona fide belief regarding taxability and no intention to evade service tax. In that situation, and in view of the pre-notice payment of tax and interest, the conditions for imposing penalties were not made out. The interest liability, however, remained payable.

Conclusion: The penalties under sections 76, 77 and 78 of the Finance Act, 1994 were not sustainable and were set aside.

Final Conclusion: The assessee's appeal succeeded to the extent of deletion of penalties, while the tax and interest liability remained intact, and the Revenue's appeal for penalty consequently failed.

Ratio Decidendi: Where service tax and interest are paid before the show cause notice and the facts disclose bona fide belief without intent to evade, the statutory bar under section 73(3) operates against notice for the amount so paid and penalties are not warranted.

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