2004 (7) TMI 613 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Adjustment of security deposit towards admitted tax liability.
2. Legality of interest demand under section 8(1) of the U.P. Sales Tax Act, 1948.
3. Impact of the High Court setting aside the penalty order on the interest demand.

Issue-wise Detailed Analysis:

1. Adjustment of Security Deposit Towards Admitted Tax Liability:
The applicant, a private limited company, deposited Rs. 36,000 as security for the release of goods intercepted at a check-post. This amount was later adjusted towards the admitted tax payable for January and February 1983, based on a circular dated December 10, 1981. The adjustment was initially not disputed by the department. However, the department later converted the security amount into a penalty, and the applicant deposited Rs. 36,000 again on January 7, 1987. The Tribunal upheld the department's stance that the adjustment could only be claimed after the penalty order, based on a subsequent circular clarifying the initial one.

2. Legality of Interest Demand Under Section 8(1) of the U.P. Sales Tax Act, 1948:
The department demanded interest for the period from March 1, 1983, to January 7, 1987, under section 8(1) of the Act, on the grounds that the applicant had failed to pay the tax admittedly due. The appellate authority and the Tribunal confirmed this demand. However, the court noted that interest is charged by way of compensation for the delay in tax payment, not as a penalty. The Supreme Court has held that interest is levied to compensate the revenue for the loss due to delayed tax payments, as seen in cases like Commissioner of Income-tax v. M. Chandra Sekhar and Central Provinces Manganese Ore Co. Ltd. v. Commissioner of Income-tax.

3. Impact of the High Court Setting Aside the Penalty Order on the Interest Demand:
During the pendency of the second appeal, the High Court set aside the penalty order for violating section 28-A, which was brought to the Tribunal's notice. The applicant argued that since the penalty was set aside, the adjustment of Rs. 36,000 was justified, and no interest could be charged. The court agreed, stating that the penalty order ceased to exist and merged into the High Court's order. Therefore, the department was in possession of Rs. 36,000 as an excess amount, and no interest could be charged as the money was already with the department. The Tribunal failed to consider this aspect, leading to the conclusion that the demand for interest was unwarranted and illegal.

Conclusion:
The court concluded that the interest under section 8(1) of the Act could not be levied as the applicant had already deposited the amount, which was later found to be in excess. The demand for interest was deemed unwarranted and illegal. The revisions were allowed, and the orders of the Tribunal were set aside.

Petitions allowed.