Penalty under section 78 fails without deliberate suppression, where tax and interest are paid before notice in a revenue-neutral dispute.

Penalty under section 78 of the Finance Act, 1994 requires deliberate suppression of facts or another positive act showing intent to evade tax. Where service tax and interest were paid before the show cause notice, the transactions were disclosed in the accounts, and the department was informed, the absence of suppression and the revenue-neutral character of the dispute weighed against penal action. A dispute over reimbursement of expenses did not alter that position. On these facts, mere non-payment was insufficient to sustain penalty, and penal liability was not attracted.

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Issues: Whether penalty under section 78 of the Finance Act, 1994 was sustainable in a case where service tax and interest were paid before the show cause notice, the transactions were disclosed in the balance sheet, the dispute involved reverse charge and reimbursement of expenses, and the assessee claimed absence of suppression and revenue neutrality.

Analysis: The tax demand itself was not disputed. The decisive question was whether the ingredients for invoking penal consequences were made out. The record showed that the assessee paid the service tax and interest promptly after being pointed out, intimated the department, and had disclosed the relevant transactions in its accounts. The dispute on reimbursement of expenses was also treated as not giving rise to tax liability. In these circumstances, the case was held to be one of revenue neutrality, and there was no positive material to show a deliberate act of suppression or intent to evade tax. The principles laid down in the cited decisions on suppression and the need for something more than mere non-payment were applied to hold that penalty could not follow.

Conclusion: Penalty under section 78 of the Finance Act, 1994 was not leviable, and the assessee succeeded.

Ratio Decidendi: Penalty under section 78 cannot be imposed unless the department establishes a deliberate suppression of facts or other positive act with intent to evade tax, and prompt payment of tax and interest before notice in a revenue-neutral situation negates such penal liability.

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