Reasonable cause waives service tax penalty where a statutory body acted bona fide and promptly paid tax after clarification.

Penalty under Section 78 of the Finance Act, 1994 was held unsustainable where the assessee, a statutory welfare body, had undertaken training activities under a bona fide belief that service tax was not payable, sought clarification through its Ministry, and paid tax and interest promptly after clarification. In the absence of any material showing intent to evade tax, the Tribunal found reasonable cause for the default and applied Section 80 to waive the penalty. The penalty was set aside.

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Issues: Whether penalty under Section 78 of the Finance Act, 1994 was sustainable, or whether Section 80 of the Finance Act, 1994 could be invoked to waive the penalty on the facts of the case.

Analysis: The dispute before the Tribunal was confined to the penalty, as the tax and interest had already been paid. The appellant was a statutory body engaged in welfare-oriented functions and had undertaken training activities in the bona fide belief that such activities would not attract service tax. The appellant had also sought clarification through its Ministry, paid the tax and interest immediately after receiving the clarification, and thereafter obtained registration for service tax compliance. In the absence of any material showing an intention to evade tax, the Tribunal treated these circumstances as constituting reasonable cause for the default.

Conclusion: Section 80 was held applicable, and the penalty under Section 78 was set aside.

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