INTROSPECTION ON WAIVER OF PENALTY UNDER PROVISIONS OF SECTION 80 OF THE FINANCE ACT, 1994

[SUBRAMANIAM M]

Regarding the   provisions of Section 80 of Finance Act, 1994 let us first be clear about the relevant provisions. Section 80 of Finance Act, 1994 specifies that, “Notwithstanding anything contained in the provisions of section 76, [section 77 or [first proviso to sub-section (1) of]] section 78, no penalty shall be imposable on the assessee for any failure referred to in the said provisions if the assessee proves that there was reasonable cause for the said failure”.  Therefore, it is upto the adjudicating authority to examine whether there was reasonable cause for the said failure.  Further   the applicability of the said Section 80 has also been arrived by the Central Board of Excise & Customs in Circular F.No. 334/3/2011-TRU dated 28-2-2011.  In the said Circular issued the Board has directed that, “ Section 80 is being amended by substituting section 78 with the words “proviso to section 78” and thus the power to waive penalty shall be available only in cases where the information is captured properly in the specified records. The revised position relating to penalties and their mitigation or waiver is summed up in the following table (portion in italics being the changes)” :

Situation	Position in records	Penalty & Provision	Mitigation	Complete Waiver
No fraud, Suppres-sion etc.	Captured	1 percent of tax or Rs. 100 per day upto 50 percent of tax amount : Sec 76	Totally mitigated if tax and interest paid before issue of notice : Section 73(3)	On showing reasonable cause under section 80
Cases of fraud, suppression etc.	Captured true & complete position in records	`50 percent of tax amount : Proviso to Section 78	(a)   1 percent per month; max of 25 percent if all dues paid before notice : Sec 73(4A); (b)   25 percent of tax if all dues paid within 30 days (90 days for small assessees) : Provisos to Section 78	-do-
	Not so captured	Equal amount : Section 78	No mitigation at all	Not possible

Thus from the direction as per Board’s Circular even if the extended period is invoked alleging suppression   the records from which short payment arrived if the records relied upon in the case are statutory   records in the form of Profit & Loss Account, Form 26AS and ST3 returns filed which are all true captured records well covered in  the second situation pointed out in Board’s reference. Therefore, in such a situation the adjudicating authority is bound to examine the service provider’s plea seeking waiver of penalty by taking into account the factual aspects, explanation offered by assessee, period of default, etc.    

2.      The Hon’ble Supreme Court  in the case of M/s Quality Welding works has held under para 14 as follows:

“.. Besides, in order to avail the benefit of Section 80, it is necessary for the assessee to make out a case to that effect before adjudicating authority by producing sufficient material in support of such contention which is required to be raised specifically in response to the show cause notice…”

The Hon’ble Karnataka High Court in the case of M/s Skypak Service Specialist Ltd reported in 2011 (9) TMI 699 - KARNATAKA HIGH COURT held that, “The contention that once there is a default, the payment of penalty is automatically unsustainable in view of the language employed in Section 80 of the Act, where if a sufficient cause is made out for the default under any of these provisions, then no penalty shall be imposed”

The Hon’ble Allahabad High Court had in the case of M/s Autoworld reported in 2010 (1) TMI 21 - ALLAHABAD HIGH COURT held that, “ Service tax paid in part with interest before show cause notice in December 2004 - No mala fide on the part of respondent - Balance tax amount paid before adjudication order - Exercise of discretion by Tribunal in setting aside penalty sustainable - Sections 78 and 80 of Finance Act, 1994.”

The Hon’ble Karnataka High Court   in the case of CST Bangalore & others Vs Motor World & others 2012 (6) TMI 69 - KARNATAKA HIGH COURT reported in STO2011Ker1093 (Date of order: 21/04/2011) had on occasion to dwell upon the question of law as to whether “Even if the ingredients stipulated in Sections 76 and 78 of the Act are established, if "reasonable cause" is shown for the failure, whether the authorities have power to impose penalties given the explicit discretion in Section 80 of the Act?” The Hon’ble High Court on analyzing the question of law categorically held that, “Section 80 is emphatic in terms of text that no penalty shall be imposable on the assessee for any failure referred to in Sections 76,77,78 and 79, if the assessee proves that there was a "reasonable cause" for the said failure. Therefore, mere failure to comply with the requirements of the Section does not vest any power in the adjudicating or assessing authority to impose penalty. Once, the failure of the requirements of the said provisions is established, in view of the non-obstante clause in Section 80, the authority has to find out whether there was any "reasonable cause" for the assessee for such failure to comply with the requirement of law. If the assessee makes out a reasonable cause. Section 80 mandates that no penalty shall be imposable on the assessee. Therefore, the sine qua non for the authority to impose penalty is as follows:-

a) existence of ingredients mentioned in Sections 76, 77 and 78:

b) failure on the part of the assessee to comply with the requirements of the said provisions:

c) absence of "reasonable cause" for the failure to comply with the requirement of law.”

 On detailed discussion, the Hon’ble High Court categorically decided that, “Even if the ingredients stipulated in Sections 76 and 78 of the Act are established, if the assessee shows reasonable cause for such failure, then the authority has no power to impose penalty in view of Section 80 of the Act”.

3.      The above judicial pronouncements and the Board’s Circular referred above are to be relied upon judiciously by the adjudicating authority to determine the applicability of Section 80 of Finance Act, 1994.  Thus when there was no malafide intent on the part of the service provider it would be a genuine case for considering the provisions of Section 80 of Finance Act, 1994 as set out under the Board’s Circular and followed by the various judicial pronouncements of Supreme Court and High Courts discussed above.