SCN Unwarranted When Service Tax Paid Before Notice U/S 73(3): Karnataka HC

The Karnataka High Court has held that when an assessee pays the tax along with interest prior to the issuance of a show cause notice, the statutory protection under Section 73(3) of the Finance Act, 1994 would apply in the absence of allegations of fraud or suppression. The bench of Justice S.G. Pandit and Justice K.V. Aravind has examined the statutory framework of Section 73 of the Finance Act, 1994 governing recovery of service tax not levied, short-levied, or short-paid. It noted that Section 73(3) specifically allows an assessee to pay the tax along with interest before the issuance of a show cause notice and mandates that no notice should be issued for the amount so paid. However, the court clarified that the protection under Section 73(3) would not apply where the department invokes the extended limitation period under Section 73(4), which requires the presence of specific elements such as fraud, collusion, wilful misstatement, suppression of facts or deliberate contravention of statutory provisions with intent to evade tax. The respondent company was registered under the service tax regime and was engaged in providing services under several categories, including commercial or industrial construction services, supply of tangible goods services, manpower recruitment and supply services, and works contract services. According to the revenue authorities, the company had allegedly availed CENVAT credit incorrectly on certain input supplies and had also collected service tax from clients but failed to deposit the same with the government. However, before the issuance of a show cause notice, the company paid the disputed tax amount along with interest. Subsequently, the department issued a show cause notice under Section 73 of the Finance Act, 1994 seeking recovery of tax, interest and penalties. In response, the assessee contended that since the tax and interest had already been paid prior to the issuance of the notice, the department was barred from issuing the show cause notice under Section 73(3) of the Act. The Commissioner, through an Order-in-Original dated May 6, 2011, concluded that penalty under Section 78 of the Finance Act, 1994 was not leviable since the assessee had paid the tax along with interest before the issuance of the show cause notice. The adjudicating authority held that the case fell within the protective ambit of Section 73(3). Aggrieved by the order, the revenue filed an appeal before the CESTAT. The Tribunal dismissed the department’s appeal and relied on a judgment of the Andhra Pradesh High Court in Commissioner of Central Excise, Visakhapatnam v. Tirupathi Fuels Pvt. Ltd., which had interpreted Section 73(3) to mean that once the tax is paid prior to the issuance of the notice, no further proceedings should ordinarily be initiated unless the case involves fraud, collusion, suppression or wilful misstatement. Before the High Court, the revenue contended that although the tax and interest had been paid before the issuance of the show cause notice, the payment was not voluntary. According to the department, the payment was made only after the authorities detected irregularities during departmental scrutiny. The department argued that Section 73(4) of the Finance Act creates an exception to the protection under Section 73(3). In cases where non-payment or short-payment arises due to fraud, collusion, wilful misstatement, suppression of facts or contravention of statutory provisions with intent to evade tax, the protection under Section 73(3) would not apply. The bench observed that invocation of Section 73(4) must be clearly pleaded and supported by specific allegations in the show cause notice. The existence of such circumstances must be demonstrated by the revenue in order to deny the statutory protection available under Section 73(3). During the hearing, the court asked the revenue to point out where the show cause notice contained allegations falling within the categories listed under Section 73(4), namely fraud, collusion, suppression or wilful misstatement. After examining the notice, the bench found that it did not contain any specific allegations establishing the existence of such circumstances. As a result, the revenue could not justify invoking the exception contained in Section 73(4). The court held that when the department fails to demonstrate the presence of these statutory conditions, the protection under Section 73(3) cannot be denied to the assessee. Agreeing with the findings of the adjudicating authority and the Tribunal, the High Court concluded that the view taken by the CESTAT was legally sound and did not warrant interference. The court further held that no substantial question of law arose from the Tribunal’s order and therefore dismissed the revenue’s appeal as devoid of merit. Case Details Case Title: Commissioner Of Central Excise And Central Tax Versus M/S Yojaka India Private Limited Citation: Jurishour-243-Hc-2026(KAR) Case No.: Central Excise Appeal No. 46 Of 2025 Date: 19/02/2026 Counsel For Petitioner: M. Unnikrishnan, Advocate Counsel For Respondent: M.R. Vanaja, Advocate Click Here To Read Order Read More: Madras HC Quashes GST Registration Cancellation; Directs GSTN-Enabled Portal Access for Filing Pending Returns

SCN Unwarranted When Service Tax Paid Before Notice U/S 73(3): Karnataka HC

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