Interpretational service tax dispute defeated penalties where no suppression or wilful evasion was shown and tax was later paid with interest.

Penalties under Sections 77 and 78 of the Finance Act, 1994 were held unjustified where the service tax short payment arose from an interpretational dispute over the timing of liability on renting of immovable property. The record showed regular maintenance of accounts, payment of tax in the ordinary course, and no suppression, fraud, or wilful evasion. The shortfall was treated as a matter of calculation and timing rather than deliberate default, and the assessee paid the tax with interest after audit objection. On that basis, reasonable cause for the lapse was found and the penalties were set aside.

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Issues: Whether penalties imposed under Sections 77 and 78 of the Finance Act, 1994 were sustainable where the service tax short payment arose from an interpretational dispute and the tax was paid on being pointed out by audit.

Analysis: The appellant had maintained regular records and had been discharging service tax in the ordinary course. The dispute arose from the timing of payment, namely whether tax on renting of immovable property was required to be paid monthly on an accrual basis instead of on the basis of annual billing followed by the appellant. The short payment was found to be a matter of calculation and timing, not a deliberate default. The record did not show suppression, fraud, or wilful evasion. The delayed payment was made after audit objection along with interest, which supported the absence of contumacious conduct and showed reasonable cause for the lapse.

Conclusion: The penalties under Sections 77 and 78 of the Finance Act, 1994 were not justified and were set aside in favour of the assessee.

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