Bona fide belief and pre-notice tax payment can defeat penalty where suppression with intent to evade is not proved.

Penalty under the Finance Act, 1994 was found unsustainable where service tax and interest were paid during investigation and before issue of the show-cause notice. The assessee's bona fide belief that the activity was not taxable, supported by decisions favourable to its case, meant suppression with intent to evade tax was not established. On that basis, the penalty was dropped, and the earlier demand confirmation did not justify penal action in the absence of the requisite mens rea.

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Issues: Whether penalty under the Finance Act, 1994 was sustainable when service tax and interest were paid during investigation and before issuance of the show-cause notice, and the assessee claimed bona fide belief and absence of suppression with intent to evade tax.

Analysis: The tax and interest were paid before the show-cause notice was issued. The assessee had entertained a bona fide belief that the activity was not taxable during the relevant period, and the controversy was supported by decisions favouring the assessee. In these circumstances, the element of suppression with intent to evade tax was not established, and the earlier demand-confirmation could not justify the penalty.

Conclusion: The penalty was held to be unsustainable and was dropped.

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