2015 (4) TMI 699 - HC - VAT and Sales Tax

Levy of penal interest under Section 23 (3) of the KGST Act - Held that - while filing the return, without including the amount of cess on rubber purchased in the turnover, the petitioner had paid tax on the turnover that was declared by it in the return. Thereafter, it was only while completing the assessment by Ext.P1 order that the demand consequent to the inclusion of cess on rubber purchased became due and payable from the petitioner. In otherwords, it is only from the date of the assessment order or the consequent demand notice that the liability of the petitioner to pay interest would arise in terms of Section 23(3) of the KGST Act. Since, in the instant case, the petitioner had paid the entire tax due as per the return, the liability of penal interest under Section 23 (3) of the KGST Act could not be fastened on it going by the decision of the Supreme Court in Maruti Wires's case (2001 (3) TMI 856 - SUPREME COURT OF INDIA). Interest under Section 23 (3A) of the KGST Act also would not apply to the petitioner for the assessment year in question namely 1996-1997. The provisions of Section 23 (3A) where introduced in the KGST Act only from 1998 and did not contemplate a retrospective operation for an anterior period. This being the case, the levy of interest on Section 23 (3A) would not apply in respect of a demand of tax pertaining to assessment year 1996-1997. - assessment order, to the extent it demands penal interest under Section 23(3) of the KGST Act on the petitioner, cannot be legally sustained. I quash Ext.P1 assessment order to the extent it demands penal interest under Section 23(3) of the KGST Act from the petitioner for the assessment year 1996-1997. - Decided in favour of assessee.

Summary

Issues:
Challenge to assessment order under KGST Act for assessment year 1996-1997, levy of penal interest under Section 23(3) of KGST Act, justification of assessment order based on Division Bench judgment, applicability of penal interest, retrospective operation of Section 23(3A) for assessment year 1996-1997.

Analysis:
The petitioner, a Company manufacturing automotive tyres and tubes, challenged the Ext.P1 assessment order under the KGST Act for the assessment year 1996-1997, which imposed penal interest of Rs. 15,41,178 invoking Section 23(3) of the Act. The dispute arose due to the inclusion of rubber cess in the purchase turnover, which was not initially disclosed by the petitioner in the return. However, the entire tax due as per the return was paid by the petitioner. The assessment included the rubber cess, making the petitioner liable for additional tax and penal interest under Section 23(3) of the Act.

In response, a counter affidavit justified the assessment order citing a Division Bench judgment and the non-inclusion of the cess amount in the return as grounds for imposing penal interest. After hearing arguments from both parties, the Court analyzed the case and referred to the Supreme Court's decision overruling the Division Bench judgment. The Supreme Court held that penal interest under Section 23(3) cannot be levied if the tax due as per the return was paid, and the liability arises only upon completion of assessment or demand notice.

The Court further clarified that the provisions of Section 23(3A) introduced in 1998 did not have retrospective application for the assessment year 1996-1997. Referring to a previous judgment, the Court established that penal interest under Section 23(3) could not be imposed if the return was correct as per law at the time of filing. Consequently, the Court ruled in favor of the petitioner, quashing the assessment order to the extent it demanded penal interest under Section 23(3) for the assessment year 1996-1997. The respondents were directed to take necessary actions based on the judgment's observations.