Service tax on residential construction upheld, but penalties deleted for bona fide belief and reasonable cause.

Service tax on construction of a residential complex was affirmed because the levy had already been upheld as constitutional, and the related interest liability was also maintained since the tax and interest had been paid. Penalties under Sections 77 and 78 were, however, set aside because taxability remained genuinely disputed during the relevant period, the assessee acted under a bona fide belief, and the transactions had been disclosed. The Tribunal applied the principle of reasonable cause to delete the penal consequences while sustaining the tax and interest demand.

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Issues: (i) Whether service tax and interest were payable on construction of residential complex; (ii) Whether penalties imposed under Sections 77 and 78 could be sustained in the presence of dispute and bona fide belief.

Issue (i): Whether service tax and interest were payable on construction of residential complex.

Analysis: The levy on construction of residential complex had been upheld as constitutional by the Bombay High Court. Following that binding view, the liability to pay service tax on the activity was affirmed. Since the demand had also been paid along with interest, the demand for tax and interest was maintained.

Conclusion: Service tax and interest were held payable and were upheld.

Issue (ii): Whether penalties imposed under Sections 77 and 78 could be sustained in the presence of dispute and bona fide belief.

Analysis: The levy remained under genuine dispute and there was confusion regarding taxability during the relevant period. On those facts, the non-payment was not treated as deliberate. Applying the principle of reasonable cause, the Tribunal followed its earlier view that penalty was not justified where the issue itself was unsettled and the assessee had disclosed the transactions.

Conclusion: The penalties were set aside.

Final Conclusion: The tax and interest liability was sustained, but the penal consequences were deleted, resulting in only partial relief to the assessee.

Ratio Decidendi: Where taxability is under genuine dispute and the assessee acts under bona fide belief, penalties may be waived for reasonable cause even though the tax and interest liability remains payable.

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