2000 (11) TMI 135 - SC - VAT and Sales Tax

Whether such late payment surcharge/interest was penal in nature and, therefore, could not be recovered, having regard to the stay of recovery thereof granted by an appropriate authority? Held that - This court did not accept the argument that it was penal but, having regard to the fact that the rate of late payment surcharge seemed penal on the facts and circumstances of the case, it reduced the assessee s obligation in respect thereof. We cannot accept the submission of learned counsel for the taxing authorities that the penalty contemplated by section 42 is analogous to a late payment surcharge/ interest. A late payment surcharge/interest is necessarily compensatory in character. A penalty is a punishment. In the premises, we hold that the assessee was not in default for the period June 24, 1989, onwards and that it cannot be subjected to penalty under section 42 in regard to that period. The demand in that behalf is set aside.

Summary

Issues involved:
1. Interpretation of provisions of sections 41 and 42 of the Karnataka Agricultural Income-tax Act, 1957 regarding the imposition of penalty.
2. Whether an assessee can be considered in default during the period of stay of recovery of tax.

Analysis:
1. The judgment dealt with the interpretation of sections 41 and 42 of the Karnataka Agricultural Income-tax Act, 1957, regarding the imposition of penalty. The case involved appeals related to assessment years 1981-82 to 1985-86. The assessee had filed appeals against the tax assessments, and stay orders were issued by the Assistant Commissioner of Agricultural Income-tax. Subsequently, penalties were proposed for non-compliance during the period of the stay. The High Court held that the appellants were liable for penalties even for the period of stay. However, the Supreme Court analyzed the provisions of sections 41 and 42, emphasizing the penal nature of penalties as opposed to interest. The Court clarified that penalties are punitive, and the obligation to pay them arises only when there is a default in tax payment.

2. The second issue revolved around whether an assessee can be considered in default during the period of stay of recovery of tax. The Supreme Court referred to the proviso in section 42(2) of the Act, which states that if an assessee has appealed or applied for revision and complied with the order regarding tax payment, no recovery proceedings shall continue until the appeal or revision is disposed of. The Court highlighted that during the period of stay, the demand for tax is in abeyance, and the assessee cannot be considered in default. The Court cited precedent to support the notion that during a stay order, the assessee is not in default of the stayed orders, and thus, no penalty can be imposed for that period.

In conclusion, the Supreme Court allowed the appeals, setting aside the penalties imposed during the period of stay of tax recovery. The Court clarified the distinction between penalties and interest, emphasizing the punitive nature of penalties. The judgment provided a comprehensive analysis of the legal provisions and established that an assessee cannot be deemed in default during a stay period, thereby exempting them from penalties for that duration.