No penalty imposable under section 78 if there was bonafide belief for non payment of service tax.

PJ/CASE LAW/2014-15/2310

Case:- M/s HONAI CONSTRUCTIONS Vs CCE, KOLHAPUR

Citation:- 2014-TIOL-248-CESTAT-MUM

Brief facts:-The appellant M/s Honai Constructions is engaged in the business of civil construction and undertakes construction works both for private sector and also for the Government sector, being the work of irrigation canal. The appellant was constructing factory premises for M/s Shirol Magasawargiya Sahakar Soot Girni Ltd. by virtue of agreement entered into on 19.10.2001. At the time of entering into agreement of construction for the private party, Service Tax was not leviable on this activity. During the currency of the contract, Service Tax was imposed on commercial construction w.e.f. 10.09.2004. The Revenue had inspected the premises of the appellant in year 2007 and found that the appellant had not paid the Service Tax on the commercial construction activity although applicable since 10.09.2004, in the case of on going project from prior to 10.09.2004. It is the case of the appellant that they were under the bona fide, impression that the Service Tax was not leviable in terms of agreement entered into prior to 10.09.2004. The appellant on being pointing out of their tax liability by the Revenue, they started paying the tax on such activity and before issue of show-cause notice had paid an amount of Rs.10 lakhs towards estimated liability. Further as per Order-in-Original, it is evident that the appellant had paid an amount of Rs.20 lakhs before passing of the order which is more than the tax found leviable Rs.17,56,977/-. The appellant states that there is no contumacious conduct on his part and the default occurred due to new levy of tax and lack of understanding on his part in respect of agreement prior to 10.09.2004. However, the penalty was imposed under Section 76, 77, 78 of the Act. Being aggrieved, the appellant had carried the matter before the Commissioner (Appeals). The Commissioner (Appeals) has recorded in para 7 of the impugned order that the appellant made the first payment of Service Tax in July, 2007, and further that the appellant should have been aware of their legal obligation towards Service Tax, and the tax could not have been collected if the Revenue has not inspected and pointed out the discrepancy to the appellant and there by confirmed the penalty under Section 78 & 77, setting aside the penalty under Section 76. The appellant being aggrieved of the imposition & sustenance of penalty under Section 78 has moved to this Tribunal in appeal.

Appellant’s contentions:-The appellant vehemently states that there has been no contumacious conduct on his part and the tax being new levy and the first offence on his part, a lenient view may be taken and imposition of penalty under Section 78 may be set aside. The appellant is not pressing for setting aside the penalty under Section 77.

Respondent’s contentions:- The learned A.R. appearing for the Revenue reiterates the findings of the Order-in-Original and Order-in-Appeal. He states that if the Revenue could not have inspected the premises of the appellant, then the evasion of tax would not have been traced out. In this view of the matter, levy of penalty is justified.

Reasoning of judgment:- The tribunal found that in view of the on going contract which was entered into prior to 10.09.2004 and the levy of tax being a new levy from 10.09.2004 and the appellant was under the bona fide belief that they do not fall under the Service Tax liability and keeping in mind the conduct of the appellant that he has discharged the Service Tax alongwith interest soon after being pointed out, it is a fit case for setting aside the penalty under Section 78 and accordingly it was done so. Thus, the appeal is allowed in part.

Decision:- Appeal partly allowed.

Comment:- The analogy of the case is that in view of the ongoing contract which was entered prior to 10.09.2004 and as Commercial or industrial construction service being a new levy implemented w.e.f. 10.09.2004, it is acceptable that the appellant was under bonafide belief that they are not liable to pay service tax. Accordingly, the penalty imposed under section 78 was set aside.

Prepared by: Monika Tak

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PJ/CASE LAW/2014-15/2310

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