Pre-show-cause tax payment defeats penalty where section 73(3) protection applies and no penal basis is established.

Where service tax and interest were paid before issuance of the show cause notice, section 73(3) of the Finance Act, 1994 protected the assessee from penalty because the department had not established the statutory preconditions for penal action. CESTAT noted that the liability was discharged before proceedings were initiated, the relevant facts were already within the revenue's knowledge, and the assessee had a bona fide view that the activity was exempt during the period. Penalty was therefore not sustainable and was set aside to that extent.

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Issues: Whether penalty was sustainable where service tax and interest were paid before issuance of the show cause notice, in the light of section 73(3) of the Finance Act, 1994.

Analysis: The tax liability was discharged along with interest before the show cause notice was issued. The payment was made before the department initiated proceedings, and the facts were already within the knowledge of the revenue. In such circumstances, the statutory protection under section 73(3) applied, and there was no basis for imposing penalty. The Tribunal also noted the assessee's bona fide understanding that the activity was exempt during the relevant period.

Conclusion: Penalty was not justified and was set aside in favour of the assessee.

Final Conclusion: The demand and interest having been paid before the show cause notice, the penalty portion of the order was annulled and the appeal succeeded to that extent.

Ratio Decidendi: When service tax and interest are paid before issuance of the show cause notice and the statutory preconditions for penalty are not established, penalty cannot be sustained under section 73(3) of the Finance Act, 1994.

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