Karnataka HC Mitigates Penalty for CA Firm That Prepaid Service Tax With Interest Ahead of Notice

Jan3,2024 #CA Firm #notice

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Published on: January 3, 2024 at 15:14 IST

The Karnataka High Court ordered a judgment reducing the penalty imposed on a registered chartered accountant (CA) firm from 100% to 25%. 4.

The decision was made based on the firm’s prepayment of service tax, inclusive of accrued interest, before the show cause notice was officially received.

The court, comprising Justice P.S. Dinesh Kumar and Justice V. Srishananda, observed that the firm had paid the service tax along with interest even before the show cause notice was delivered to them. Consequently, the penalty was decreased from 100% to 25%. The court directed the CA firm to remit Rs. 2,50,000 to resolve the matter equitably.

The case pertained to the CA firm, appointed as an internal auditor for Karnataka State Financial Corporation (KSFC), a state government entity.

Due to payment delays from KSFC for services rendered by 45 individuals engaged by the firm for an audit project, the firm paid the service tax belatedly upon receipt of the payment from KSFC.

Despite replying to a subsequent show cause notice from the Department explaining the delayed payment, the firm received summons, alleging suppression of taxable service value to evade service tax payment, thereby inviting penalties under Sections 76, 77, and 78.

The firm contended that once the service tax with interest was settled, the extended period clause was inapplicable. They argued against the penalty, stating that the necessary service tax with interest had already been remitted before the second show cause notice.

The court acknowledged the firm’s payment and the interest on service tax before the issue of the second show cause notice, leading to the conclusion that the penalty imposed by authorities was excessive.

The Court’s decision reduced the penalty to 25% based on the provisions specified in the section governing penalties for service tax defaults.

As per the Court’s directives, the CA firm agreed to settle the matter by paying Rs. 2,50,000 to the Department, and upon payment, the proceedings concerning service tax, interest, and penalties would be deemed concluded.

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