Late filing fee for filing of service tax return

Take into consideration the below grounds. 

1) As per Section 70 & Rule 7 of Service Tax Rules, Returns needs to be filed by the assesee. As per the definition of Assessee, an assessee is the person who is liable to pay service tax. 

In your case, your client isn't a assessee. So no penalty for Non-filing of Returns. However, since the business was closed your client was required to surrender the certificate which he didn't. Therefore, department can impose penalty under Section 77, Contravenation of Provision which was limited to 5000 uptill 8th April 2011, now its 10000.

2) What department is contending is not Penalty, its actually fees for late filing of Return which was Rs1000 till 10-05-07, Rs 2000 from 11-5-07 to 07-04-2011 & after 07-04-2011 its Rs. 20000. 

Department can't impose late filing fees of Rs. 20000 for all the returns retrospectively. As Fees and Penalty are imposed or proposed at the point of default and at the prevaling provision regarding fees and Penalty. Hence, default in your case happened at multiple points ie the date of filing returns, and therefore penaly shall be imposed, if any, shall be according to that default point.