Prior payment of service tax and interest before notice bars penalty proceedings under the statutory scheme.

Prior payment of service tax and interest before issue of a show cause notice was treated as ending penalty proceedings under the statutory scheme. The text states that, where tax and interest are discharged on the assessee's own or departmental prompting before notice, section 73(3) of the Finance Act, 1994 contemplates non-pursuit of penal action, and section 80 supports non-imposition of penalty in appropriate cases. On that basis, the penalties imposed under sections 76, 77 and 78 were set aside, and relief was granted to the assessees.

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Issues: Whether penalties under the service tax provisions were sustainable where the assessees paid the entire service tax and interest before issue of the show cause notice.

Analysis: The assessees discharged the tax liability along with interest before the issuance of the show cause notice. The governing statutory framework, including section 73(3) of the Finance Act, 1994, contemplates that where tax and interest are paid on the assessee's own or departmental prompting before notice, penalty proceedings are not to be pursued and the proceedings are treated as concluded. In the circumstances, the discretion reflected in section 80 of the Finance Act, 1994 and the departmental circular relied upon supported non-imposition of penalty. The enhanced penalties imposed under sections 76, 77 and 78 were therefore not justified.

Conclusion: The penalties were set aside and the appeals were allowed in favour of the assessees.

Final Conclusion: Where service tax and interest are paid before issuance of notice, penalty proceedings do not survive and the assessee is entitled to relief against penal demands.

Ratio Decidendi: Prior payment of service tax and interest before a show cause notice, in the circumstances contemplated by section 73(3) of the Finance Act, 1994, bars penalty proceedings and warrants setting aside of penalties.

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