Bona fide belief bars penalty while service tax collected but unpaid remains recoverable with interest

Differential service tax collected from clients but not fully paid was held recoverable with interest, since the assessee did not dispute collection of the excess tax and the amount was payable to the revenue. Penalty was not justified because the default was attributable to a bona fide belief that tax was payable only on the assessable value, and there was no evidence of mala fide intent. The demand and interest were upheld, while the penalty was deleted, granting partial relief to the assessee.

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Issues: (i) Whether the differential service tax collected from clients but not paid in full was recoverable along with interest; (ii) whether penalty was sustainable in the absence of mala fide intent.

Issue (i): Whether the differential service tax collected from clients but not paid in full was recoverable along with interest.

Analysis: The assessee did not dispute the collection of excess service tax from clients. The amount collected on behalf of the revenue was therefore liable to be paid, and the accompanying interest followed.

Conclusion: The demand and interest were confirmed against the assessee.

Issue (ii): Whether penalty was sustainable in the absence of mala fide intent.

Analysis: The conduct was found consistent with a bona fide belief that tax was payable only on the assessable value. In the absence of evidence of mala fide, penalty was not justified.

Conclusion: The penalty was set aside in favour of the assessee.

Final Conclusion: The service tax demand and interest were upheld, but the penalty was deleted, resulting in partial relief to the assessee.

Ratio Decidendi: Penalty is not warranted where the default is supported by a bona fide belief and there is no evidence of mala fide, even though the tax demand and interest may still be recoverable.

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