CA Firm Paid Service Tax With Accrued Interest Before Show Cause Notice: Karnataka High Court Reduces Penalty From 100% To 25%

The Karnataka High Court has held that the service tax has been paid with accrued interest even before the show cause notice has reached the review petitioner.

The bench of Justice P.S. Dinesh Kumar and Justice V. Srishananda has observed that the show cause notice itself shows that there was a payment of service tax along with interest by the review petitioner. The court has reduced the penalty from 100% to 25% and directed the review petitioner to pay Rs. 2,50,000 to meet the ends of justice.

The review petitioner is a registered chartered accountant firm. The review petitioner was appointed as an internal auditor for Karnataka State Financial Corporation (KSFC), a state government undertaking. The petitioner firm appointed 45 persons to carry out the audit work with KSFC, and KSFC was required to pay salaries for 45 persons engaged in the audit work. KSFC delayed making the payment.

The petitioner firm was required to pay service tax only upon receipt of service tax from KSFC.

The petitioner, in view of the delay in receipt of payments from KSFC, made a delayed payment of service tax with interest. However, the Department issued a show cause notice, which was received by the petitioner without any details of the specific work attracting the service tax. The show cause notice was duly replied to, and despite the reply, the petitioner was served with the summons.

The petitioner contended that in the show cause notice, the Department was of the prima facie opinion that there was suppression of the value of taxable services rendered with an intent to evade payment of service tax. Therefore, the assessee rendered themselves liable for the imposition of penalties under Sections 76, 77, and 78.

The petitioner contended that once the service tax with interest is paid, there is no scope for invoking the extended period. The penalty was levied on the ground that the assessee has not filed an ST-3 return nor paid service tax, suppressing the very fact from the Department.

As per the first proviso to Section 73, the penalty payable was 50%, and as per the second proviso, the penalty payable is 15%. As per the second proviso (ii), the penalty payable will be 25%. The show cause notice dated August 8, 2007, and September 18, 2008, was duly replied to on October 1, 2007. The service tax with interest along with ST-3 returns was filed on August 20, 2007, pertaining to the period 2005–06, and 2006–07. In other words, before the issue of the second show cause notice on September 18, 2008, there was already a payment of service tax with interest. Therefore, the second proviso would be applicable, and authorities could not have imposed the penalty of 100% on the assessee. The explanation of said section would make it clear as to what the section means by specified records.

The petitioner, in the first show cause notice, acknowledges the payment of service tax and the interest thereon, and therefore, the Additional Commissioner of Service Taxes, at the first instance, who passed the order in its original form, ought not to have saddled a 100% penalty on the review petitioner.

The affidavit filed by the review petitioner clearly mentioned that he intends to put quietus by paying 25% of the penalty.

The court disposed of the review petition and directed the review petitioner to pay Rs. 2,50,000 to the Department as agreed in the affidavit. On payment of the sum of Rs. 2,50,000, the proceedings in respect of service tax, interest, and penalty shall be deemed to be concluded.

Counsel For Petitioner: S.S. Naganand

Counsel For Respondent: Jeevan J. Neeralgi

Case Title: M/S. V.K. Niranjan And Co Versus Commissioner Of Service Tax

Case No.: REVIEW PETITION No.384 OF 2022 

Citation: 2023 LiveLaw (Kar) 08

Click Here To Read The Order