Reasonable cause defeats service tax penalty where delay arose from bona fide confusion and tax was paid after clarification.

Penalty under Section 76 of the Finance Act, 1994 was held unsustainable because the delayed service tax payment arose from bona fide confusion over the taxability of renewal commission on policies issued before 16-8-2002. The assessee had sought clarification from the Board and, after receiving it, promptly paid the service tax and then the interest. On these facts, the delay was treated as a genuine interpretational difficulty rather than deliberate default, so Section 80 applied and reasonable cause was established. The penalty order was set aside.

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Issues: Whether penalty under Section 76 of the Finance Act, 1994 was liable to be imposed for delayed payment of service tax, or whether the delay was covered by Section 80 of the Finance Act, 1994 on account of reasonable cause.

Analysis: The delay occurred in a period when there was confusion regarding taxability of renewal commission paid after 16-8-2002 in respect of policies issued before that date. The assessee had sought clarification from the Board and, immediately after receiving it, paid the service tax and thereafter the interest. On these facts, the delay was not viewed as a deliberate default but as one arising from a genuine interpretational difficulty.

Conclusion: Section 80 applied and penalty under Section 76 was not sustainable.

Final Conclusion: The penalty order was set aside and the appeal was allowed.

Ratio Decidendi: Where delayed payment of service tax is caused by bona fide confusion on taxability and the tax and interest are paid promptly after clarification, penalty is not warranted if reasonable cause is established.

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