Payment of Tax before issue of SCN not a bar to Impose Penalty: Delhi HC [Read Judgment]

A division bench of the Delhi High Court has held that the payment of tax amount before the issuance of the show cause notice would not absolve the assessee from imposing penalty under the provisions of the Finance Act, 1994.

The assessee, engaged in providing commercial coaching and training services, have not paid up his liability for the period 09.09.2004 to 31.03.2008. in its income tax returns, assessee declared that there was no service tax liability.

The Income Tax Search and Seizure proceedings further resulted in investigations by service tax authorities and a show cause notice demanding tax and imposing penalties was issued against the assessee. Consequently, the assessee paid the due amount.

After payment of tax amount due, the assessee submitted that since they deposited an additional amount of Rs.5,06,270/- after the show cause notice was issued and had paid Rs.34 lakhs prior to that, imposition of any penalty under Section 76 was unjustified.

The division bench comprising of Justice Ravindra Bhatt and Justice AK Chawla noted that the assessee was aware about its service tax liability; despite this knowledge, it filed its returns claiming that no liabilities were attracted. When it smelt investigation and adverse orders, it apparently approached the service tax authorities and deposited the amounts which they were admittedly liable to pay.

“Such being the case of foreknowledge, in the opinion of the court, itself is an important factor that ought to have been and was taken into account by the lower revenue authorities. Hence, foreknowledge lead to the imposition of recovery of dues assessed as well as imposition of the penalty under Section 78. The court is of the opinion that the invocation of Section 78 cannot be faulted with having regard to the facts of this case. Depositing the amount due, by the appellant, before issuance of show cause notice per se does not absolve the appellant of its responsibility to file the returns, since the option of imposing other penalty under Section 76 was exercised. Being a matter of discretion, its judicious exercise, is all that is in question. Having regard to the fact of concurrent findings, we are of the opinion that the exercise of such discretion reserving imposition of Section 76 in the circumstances, does not call for interference,” the bench said.