Penalty for tax default fails when tax and interest are paid before notice and no suppression or fraud is alleged.

Penalty under the Finance Act, 1994 was held unsustainable where tax and interest were paid before the show cause notice and the notice did not allege suppression, fraud, wilful misstatement or comparable culpable conduct. The liability was detected through audit of returns, and the circumstances indicated bona fide conduct. On those facts, statutory relief from penalty was available and invocation of penalty under section 78 was not justified, so the penalty was set aside in favour of the assessee.

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Issues: Whether penalty under section 78 of the Finance Act, 1994 was sustainable when the tax and interest had been paid before issuance of the show cause notice and the notice did not allege suppression, fraud or misstatement.

Analysis: The tax liability and interest were discharged before the show cause notice was issued. The notice did not attribute suppression of facts, fraud, wilful misstatement or comparable culpable conduct necessary to attract the penalty provision. The liability came to light through audit of the returns, and the circumstances showed bona fide conduct. In these facts, the statutory relief from penalty was held to be available and the invocation of penalty under section 78 was not justified.

Conclusion: The penalty under section 78 was not sustainable and was set aside in favour of the assessee.

Final Conclusion: The impugned order imposing penalty did not survive and the appeal succeeded.

Ratio Decidendi: Where tax and interest are paid before issuance of the show cause notice and the notice does not establish suppression, fraud or misstatement, penalty under section 78 cannot be sustained and the assessee is entitled to relief under section 80.

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