Pre-notice payment protection under Section 73(3) prevents penalty under Section 78 when tax and interest paid before notice.

Pre-notice payment under Section 73(3) of the Finance Act, 1994 was held to preclude imposition of penalty under Section 78 where service tax and interest identified on audit were paid before issuance of show cause notice; the explanatory provision in Section 73(3) removes penalty liability for such payments. The record lacked substantive evidence of suppression to warrant invoking the extended period or penalties. Consequently penalties under Section 78 and other penal provisions were set aside and the assessee permitted benefit of the statutory pre-notice payment route.

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Issues: Whether penalty under Section 78 of the Finance Act, 1994 can be imposed where the service tax along with interest was paid before issuance of show cause notice and whether the appellant is entitled to benefit under Section 73(3) of the Finance Act, 1994 in respect of amounts paid on audit.

Analysis: The issues arose on audit and the amounts of service tax identified by the audit team were paid by the appellant along with interest prior to issuance of show cause notices. Section 73(3) permits payment of service tax on the basis of ascertainment before service of notice and contains an explanation declaring that no penalty shall be imposed in respect of such payment. The record does not disclose substantive evidence of suppression to justify invocation of the extended period or imposition of penalties. In these circumstances the penal provisions cannot be applied where the statutory pre-notice payment route under Section 73(3) is available and acted upon by the assessee.

Conclusion: Penalty under Section 78 and other penalties imposed are set aside; the appellants are entitled to the benefit of Section 73(3) of the Finance Act, 1994 and penalties cannot be imposed where tax with interest was paid before service of notice.

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