CAN SHOW CAUSE NOTICE BE ISSUED IF TAX AND INTEREST
IS PAID BEFORE SHOW CAUSE NOTICE?
V S Datey
As a general rule, it is said that ignorance of law is not an excuse. However, there is no
presumption that everyone knows the law. In case of service tax, ignorance of law can be
an excuse for non-imposition of penalty. If assessee pays service tax and interest before
show cause notice, notice cannot be issued unless there was suppression of facts or wilful
Often, assessee is liable to pay service tax on some services, but he is not aware of
liability. After being pointed out this, either by audit party or his own auditor or
consultant, he pays service tax with interest. Issue is whether a show cause notice
proposing penalty can be issued after payment of service tax.
In case of service tax, section 76 (penalty for failure to pay service tax) and section 77
(penalty for contravention of any provision for which no penalty is provided), do not
envisage mens rea. (Mens rea means guilty mind). Section 78 of Finance Act, 1994
provides for penalty in case of fraud, collusion, wilful misstatement or suppression of
facts. This obviously requires mens rea.
Section 80 of Finance Act provides that notwithstanding anything contained
in provisions of section 76, 77 and 78, penalty is not imposable if assessee
proves that there was reasonable cause for the failure to pay service tax.
As discussed below, my submission is that ‘ignorance of law’ can be given as
excuse for avoiding penalty, as there is no presumption that everyone knows
the law. Ignorance of law can be ‘reasonable cause’ for failure to pay service
tax. Further, no notice can be issued if tax and interest is paid before SCN.
1.1 No SCN after tax is paid
As per section 73(3) of Finance Act, 1994, if assessee pays service tax with interest on
his own or on the basis of assessment of central excise officer, he should inform to
department and then, the central excise officer shall not serve any notice u/s 73(1