Supreme Court of India
J.K. SYNTHETICS LTD.versusTHE COMMERCIAL TAXES OFFICER
- Citation
- 1994 INSC 197
- Decided
- 9 May 1994
- Bench
- M N VENKATACHALIAH
Holding
Interest under Section 11‑B is not payable when the assessee has paid the tax due on the basis of the return filed; it accrues only on amounts unpaid after a final assessment or notice of demand, and the minority view of Bhagwati J. is the correct law.
Summary
J.K. Synthetics Ltd. filed sales‑tax returns on the basis that freight charges on cement sales were not part of the taxable price and paid the tax shown in those returns. The Commercial Taxes Officer later added the freight amount to the sale price, assessed additional tax and levied interest under Section 11‑B of the Rajasthan Sales Tax Act. The appellant argued that interest could be charged only after a final assessment and that the tax paid on the basis of the return satisfied Section 7(2) and 7(2A). The Court examined the meaning of "tax payable" in Section 11‑B, the relationship between Sections 7(2), 7(2A) and 11‑B, and the earlier decisions in Associated Cement Co. and Ghasi Lal. It held that interest is not payable when the assessee has paid the tax due on the return filed; interest accrues only on amounts unpaid after a final assessment or notice of demand. The minority view of Bhagwati J. was affirmed, overruling the Associated Cement Co. majority. Consequently, the interest demanded was ordered to be refunded.
Issues considered
- Whether interest under Section 11‑B of the Rajasthan Sales Tax Act is payable on tax assessed after the return has been filed and the tax shown in the return has been paid.
- From what date does interest under Section 11‑B accrue – the date of filing the return or the date of final assessment/notice of demand?
- How should the term "tax payable" in Section 11‑B be interpreted in relation to Sections 7(2) and 7(2A)?
- Whether the majority view in Associated Cement Co. Ltd. v. C.T.O. should be followed or the minority view of Bhagwati J. is correct.
- Whether the appellant is liable to pay interest on the differential tax arising from inclusion of freight charges.
Legislation cited
- Central Sales Tax Act, 1965s. 9(2)
- Rajasthan Sales Tax Act, 1954s. 10, s. 11-B, s. 16(1)(b), s. 3, s. 5, s. 7(2), s. 7(2A), s. 7A, s. 7AA
Subjects
sales taxinterestSection 11-Bself‑assessmentfreight chargespenaltyRajasthan Sales Tax Actstatutory interpretationfinal assessment
Judgment
.!
A J.K. SYNTHETICS LTD.
v.
THE COMMERCIAL TAXES OFFICER
"'-
MAY 9, 1994
B [M.N. VENKATACHALIAH, C..L, A.M. AHMADI, .J.S. VERMA,
G.N. RAY AND S.P. BHARUCHA, JJ.j
Rajasthan Sales Tax Act, 1954.
c Sales Sections
Tax
7(2), 7(2A), J JB-77ie appellant paid the whole amount of
returns filed on the premise that freight charged did not Jami
011
part of the p1ic&-The revenue contended otherwise--Sales tax liability ul-
timately worked ow by adding freight to p1ic&-Differencc on tax liability
ivorked out-Whether interest on the dijJ'erence liable to be recovered?
D The appellant challenged before the Commercial Taxes Officer the
.levy of interest on tax on the amount of freight charged in respect of sale
of cement. The Commercial Taxes officer held that the appellant was
required to pay interest on the additional sales tax which had to be paid
on the inclusion of the freight amount in calculating the sale price.
Aggrieved by the judgment of the Commercial Taxes Officer, the appellant
.E preferred the present appeal.
On behalf of the appellant it was contended that interest under
Section 11-B of the Rajaothan Sales Tax Act, 1954 can only be charged
subsequent to the determination of Sales Tax under the final assessment;
that its case related to differential tax under Section i (2A) and not Section
F
7(2); and that since the full amount of tax 'shown' in the return was
deposited the question of payment of interest does not arise.
On behalf of the respondent it was contended that interest becomes
payable from the date on which the original return was filed under Section
G 7(2) or 7(2A) of the Act; and that failure to deposit the tax due on final
assessment would entail liability to pay interest under section 11-B of the
Act.
Allowing the appeal, this Court
H HELD: 1. Section 11-B of the Rajasthan Sales Tax Act, 1954 nowhere
964
JK SYNTHETICS v. COMMERCIAL TAXES OFFICER [AHMADI. .I.I 965
....\ .....,.. provided for payment of interest on the unpaid tax amount as found on A
final assessment from the date of the filing of the return under Section 7
of the Act. If the amount of tax payable under Section 7 (2) or 7(2A) is paid
there is no question of payment of interest under Section 11-B(a) or
11-B(b). (972-B-C]
2. So long as the assessee pays the tax which according to him is due B
on the basis of information supplied in the return filed by him, there would
be no default on his part and it would be difficult to hold that the "tax
payable" by him "is not paid" to visit him with the liability to pay interest
under Sectionll-B of the Act. (981-G]
3. It is difficult on the plain language of the section to hold that the
c
law envisages the assessee to predicate the final assessment and expect
him to pay the tax on that basis to avoid the liability to pay interest. That
would be asking him to do the near impossible. [981-H, 982-A]
)
Associated Cement Company v. C.T.O. & Ors., 48 STC 466, overruled D
and State of Rajasthan v. V Ghasi Lal, 16 STC 318, relied on.
CIVIL APPELLATE JURISDICTION : Civil appeals Nos. 3414-16
of 1982 etc etc.
From the Judgment and Order dated 5.11.81 of the Commercial tax E
Officer, Special Circle Kola, in G.l.R. No. J-3 of 1977-78.
Harish N. Salve, Ashok Sen, Ravinder Narain, Ms. Amrit Mitra D.N.
Misra for JED & Co. Ms. Meenakshi Grover, Ms. Poonam Madan, Krishna
Kumar, Bhasker Raj Pradan, for Khaitan & Co., AP. Dhjamija, S. Atreya,
-· N.D.B. Raju, S.K. Jain, M. Nisha Bagchi, Ms. Ayesha Khatri, Ms. Indu
Malhotra, Ms. Kusum Chaudhary and Aruneshwar Gupta for the appear-
ing parties.
F
The Judgment of the Court was delivered by :
AHMADI, J. These appeals by special leave are directed against G
certain assessment orders made by the Commercial Taxes Officer relating
to the Assessment Years 1975-76, 1976-77 and 1977-78 under the Rajasthan
Sales Tax Act, 1954 (hereinafter called 'the Act') and the Central Sales Tax
,_..>- Act, 1965 (hereinafter called 'the Central Act'). The ques•.ion relates to
payment of interest on tax on the amount of freight charge:d in respect of H
~
,'
'
I
966 SUPREME COURT REPORTS [1994] 3 S.C.R.
A sale of cement under the relevant Cement Control Order. The returns were ,_,.-.,
filed by the appellant on the promise that the amount of freight cliarged
in respect of sale of cement under the said Control Order did not form
part of the sale price for the payment of sales tax. The appellant contends
that it had raised the contention bona fide but the same was rejected by
this Court by its judgment and order dated August 22, 1978 in the case of
B Hindustan Sugar Mills Ltd. v. State of Rajasthan and J.K. Synthetics Ltd. v.
C. T.O., Kata, 43 STC 13. By the said decision this Court held that the
freight element formed part of the price of cement and sales tax was
leviable on the sale price inclusive of the freight amount. The appellant ¥
~
was, therefore, required to pay sales tax on the sale price inclusive of the
c freight. There is now no dispute on the question of computation of the sale
price for calculating the sales tax. The dispute now is limited to whether
the appellant is required to pay interest on the additional sales tax which
had to be paid on the inclusion of the freight amount in calculating the sale
price. According to the appellant interest under Section 11-B of the Act
can only be charged for the period subsequent to the determination of sales
D
tax under final assessment and that too after the expiry of the period
allowed under the Notice of Demand issued on finalisation of the assess-
ment. This contention of the Assessee is countered by the Revenue. Ac- k
cording to the latter, interest becomes payable from the date on which the
original return was filed under Section 7(2) or 7(2A) of the Act, as the
E case may be. The Assessee supports its contention on the decision of this
Court in State of Rajasthan v. V. Ghasi Lal, 16 STC 318 whereas the c:
Revenue places reliance on the decision rendered by this Court in As-
sociated Cement Company v. C. T.O. & Ors.,, 48 STC 466 wherein it was
held that where a return is filed under section 7(2) of the Act, interest runs
from the date of filing of the return. The Assessee, however, seeks to
F
distinguish it on the ground that the case related to deposit of differential
4.
tax under section 7(2A) of the Act. We will, therefore, be required to '
interpret sections 7(2), 7(2A) read with section 11-B of the Act and section
9(2) of the Central Act and the ratio of the decisions of which reliance has
been placed.
G
Under the Act by virtue of the charging section 3 the liability to pay
tax arises. Section 5 prescribes the rate of tax. Section 7(1) provides that
every dealer liable to pay tax shall furnish returns of his turnover for the
prescribed pericds in the prescribed form and in the prescribed manner __,;___
_ ....
H within the prescnbed time, to the assessing authority. Section 7(2) says that
J.K. SYNTHETICS v. COMMERCIAL TAXES OFFICER [AHMADI, J.) 967
every such return shall be accompanied hy a treasury receipt or receipt of A
any authorised bank showing the deposit of the full amount of tax due on
the basis of the return in the Government Treasury or bank concerned.
Sub-section 2A added to section 7 by Rajaslhan Act 13 of 1963 with effect
from 29th April, 1963, empowers the Slate Government notwithstanding
sub-section (2) to require any dealer or class of specified dealers to pay
tax at intervals shorter than those prescribed under sub-section (1) in which B
case the dealer will deposit the tax al such shorter intervals. Such deposit
of tax shall, under section 7(4), be deemed to be provisional, subject to
, necessary adjustments in pursuance of the final assessment of tax. Section
7A enjoins the making of a provisional assessment on best-judgment basis
if the dealer fails to submit a return or fails to deposit tax as required by
section 7(2A). Section 7AA prescribes the penalty for failure to furnish the
c
returns. According to section 10 the assessment and determination of tax
due for any year, shall be made after the returns for all the periods of that
year have become due. Section llB makes provisions for charging interest
on failure to pay tax, fee or penalty. Clauses (a) and (b) of the said section
11-B before its substitution by Act 4 of 1979 w.e.f. 7th April, 1979, read as D
under:
"llB. Interest on failure to pay tax, fee or penalty : (a) If the
amount of any tax payable under sub-sections (2) and (2A) of the
section 7 is not paid within the period allowed, or
E
(b) If the amount specified in any notice of demand, whether for
tax, fee, or penalty, is not paid within the period specified in such
notice, or in the absence of such specification, within 30 days from
•
the date of service of such notice, the dealer shall be liable to pay
simple interest on such amount at one per cent per month from
j ) the day commencing after the end of the said period for a period F
. of three months and at one and a half per cent per month
thereafter during the time he continues to make default in the
11
payments.
(The two provisos are not material for our purpose) G
The Rajasthan Sales tax Rules, 1955, hereinafter called 'the Rules',
provide in Chapter VII for the filing of returns, etc. Rule 25 provides that
the return referred to in section 7(1) shall be in Form ST 5 and shall be
__ ..._ signed by the dealer or his agent. The said return has to be filed for such
quarters ending with the last day of the months of June, September, H
968 ·SUPREM.E COURT REPORTS [1994] 3 S.C.R.
)
A December and Man;h Of every assessment year if the 'previous year' of the
dealer ends on 31st March of any year, and in other cases for each of the
quarters of the year of accounts of the dealer. The rule further provides
that if the return is not accompanied by a receipt showing deposit of tax
as required by section 7(2), the Assessing Authority shall not be bound to
take cognizance of .the return. If we turn to Form ST 5 we find that the
B Column 11 thereof requires the dealer to indicate the turnover for the
concerned quarter and permits certain deductions enumerated therein.
The return has to be verified in the manner indicated at the foot of the
form. It was, therefore, contended on behalf of the Revenue that a conjoint
reading of section 7 and Rule 25 clearly brings out that the dealer or his
agent is under an obligation to file a true and complete return and hence
c the failure to deposit the tax due on the turnover as determined on final
assessment would entail liability to pay interest. It may be noted that
section26 (5) of the Act makes all rules made under the said provision and
duly published in the Gazette to form part of the Act itself on such
publication.
D
The Assessee contends that since the present case related to the
deposit of differet:.tial tax under sub-section (2A) of section 7 and not
under section 7(2) the differential tax required to be paid would be on 'the
full amount of tax due shown in the return'. Since in the present case the
full amount of tax 'shown' in the return was deposited no such demand for
E interest as has been made could be entertained. The Revenue on the other
hand contends that when the law enjoins on the Assessee to files a 'return',
it can ori.ly mean a true and correct return, that is, a return which reflects
the tax due on fmal assessment. Therefore, contends the Revenue, as the
whole amount found due on final assessment was not included in the return l
and the full amount of tax due on that basis was not deposited as required
F by law, interest became payable under section 11-B of the Act. The
Assessee on the contrary relies on the difference in language between
sub-sections (2) and (2A) of section 7 and emphasising on the words
'amount of tax due shown in the return' found in sub-section (2A) of
section 7, which phraseology is not to be found in sub-section (2) of that
G section, contends that no interest can be charged under section 11-B.
Sub-sections (2) and (2A) of section 7 as they stood before their
amendmeut by Rajasthan Act 4 of 1979, read as under :
"(2). Every such return shall be accompanied by a Treasury receipt
H or receipt of any Bank authorised to receive money on behalf of
J.K. SYNTI-!ETICS v. COMMERCIAL TAXES OFFICER [AHMADL J.] 969
the State Government, showing the deposit of the full amount of A
lax due on the basis of return in the Government Treasury or Bank ,
cor.cerned.
(2A). Notwithstanding anything contained in sub-section (2), the
S_tate Government may by notification in the Official Gazette
require any dealer or class of dealers specified therein, to pay tax B
at intervals shorter than those prescfibed under sub-section (1). Jn
such cases, the proportionate tax on the basis of the last return
shall be deposited at the intervals specified in the said notification
in advance of the return. The difference, if any, of the tax payable
according to the return and the advance tax paid shall be deposited C
with the return and the return shall be accompanied by the treasury
receipt or receipts of any Bank authorised to receive money on
behalf of the State Government, for the full amount of tax due
·shown in the return. 1'.
In sub-section (2A); by Amending Act 4 of 1979, the words 'tax according D
to his accounts' were substituted for the words'proportionate tax on the
basis of the last return' atid the latter part of the sub-section was restruc-
tured by deleting the words 'The difference, if any, of the tax payable
according to the return and the advance tax paid shall be deposited with
the return' and making the sentence a running one. Sub-section (3) permits E
a dealer who discovers any error or omission in his return to submit a
revised return in the prescribed manner before the time prescribed for the .
submission of the next return but not later.
Now section 7(2) says that every 'such' return, meaning thereby the
return referred to in section 7(1), shall be accompanied by a receipt
F
showing the deposit of the full amount of tax due ',on the basis of the
return'. In other words the dealer is 1equired to pay the full amount of tax
that becomes due on the basis of the particulars in regard to the turnover
and taxable turnover disclosed in the return. Sub-section (2A) begins with
a non-obstante clause, namely, notwithstanding anything contained in sub- G
section (2), and provides that any dealer or class of dealers specified in the
notification may pay the tax at intervals shorter than those prescribed
under sub-section (1), in which case the tax shall be deposited at the
intervals specified in the notification in advance of the return and the
return shall be accompanied by the receipt for the full amount of _tax due H
970 SUPREME COURT REPORTS [1994] 3 s:c.R.
A 'shown in the return'. Although the phraseology used in sub-sections (2)
and (2A) of section 7 is not the same, the content and purport of the two
sub~sections i.s more or less identical, namely, both the sub-sections require
that the return shall be accompanied by & receipt evidencing the deposit
of the 'ful! amount of tax due' on the basis of the return or on basis of the
B information shown in the return. The full amount of tax due and payable
prior to the submission of the return is clearly relatablL to the information
furnished in the return. Undoubtedly, the information to be furnished in
the return must be 'correct and complete', that is, true and complete to the
best of knowledge and belief, without the dealer being guilty of wilful
omission. This is the essence of the verification clause found at the foot of
c From ST 5. Ruic 25 expects the verification of the return to be in the
manner indicated in Form ST 5. Therefore, on a conjoint reading of section
7(1), (2) and (2A), Ruic 25, the information to be furnished under Form
ST 5 and the form of verification, it becomes clear that the dealer must
deposit the full amount of tax due on the basis of information furnished,
D \vhich information must be correct and complete to the best of the dealer's
knowledge and belief without he being guilty wilfnl omission. If the c!ealer
has furnished full particulars in rc.<-,pect of his bu".iness, \Vithout wilfuily
omitting or withholding any particular inforn1ation which has a bearing on
the assessment of tax, which he honestly believes to be 'correct and
E complete', it would be difficult to hold that the dealer had not acted 'bona
fide' in depositing the tax due on that information before the submission
of the return. Of course the tax so deposited is to be deemed to be
provisional and subject to necessary adjustments in pursuanc~ of the final
assessment. Section 7AA empowers levy of penalty if the assessing
F authority is satisfied that any dealer has 'without reasonable cause' failed
(
to furnish the return under section 7(1) within the time allowed. The use
of the words 'without reasonable cause' clearly implies that if .the deale(
can sho\V reasonable cause for his lapse he cannot be visited with the
penalty prescribed by section 7AA. To put it differently if reasonable cause
G is shown by the dealer for the lapse, he cannot be visited with penalty under
this provision. This is also suggestive of the fact that the legislature desired
to be harsh with wilful defaulters or those guilty of wilful omission of
material information and not with dealers who failed to supply some
information under the 'bona fide' belief that the same was not necessary or
those who failed to pay the full tax due not with a view to evading or
H
J.K. SYNTHETICS v. COMMERCIAL TAXES OFFICER [AHMADI, J.] 971
avoiding the liability to pay the tax but because they bona fide believed that A
they were liable to pay the tax assessed by them on the basis of the return
and no more. If at a later date on the basis of a different interpretation put
on the language of the relevant provisions of the law, the dealer becomes
to pay tax in excess of that already paid, he may be called upon to make
good the difference bu.I he cannot be visited with penalty under section B
7AA unless it is shown that the dealer had withheld payment of the
differential tax by wilfully withholding material information or had acted
without reasonable cause in committing the default. The Assessee, there-
fore, contends that there was no wilful omission in not including the freight
charges in the price of the commodity on the basis whereof the tax was
assessed before filing of the returns; on the contrary, contends the Asses-
c
see, it had acted 'bona fide' having regard to the ratio of this Court's
decision in Hyderabad Asbestos Cement Products Ltd. v. State of Andhra
Pradesh, 24 STC 487. Counsel for the Revenue, however, points out that
considerations for the levy of penalty under section 7AA are different from
those which guide the recovery of interest under section llB and while in D
'
a given case levy of penalty may not be permissible, recovery of interest on
unpaid tax amount may still be justified.
As the relevant Assessment Years in question are from 1975-76 to
1977-78 we are concerned with section llB as it stood before its substitu-
tion by Act 4 of 1979 w.e.f. 7th April, 1979. Section llB then provided that E
if the amount of any tax payable under sub-sections (2) and (2A) of section
7 is not paid within the time allowed or if the tax amount specified in any
notice of demand is not paid within the period specified, the dealer shall
be liable to pay simple interest on .such amount at one per cent per month
for a period of three months and thereafter at one and a half per cent per
F
month during the time he continues to make default in the payments.
However, according to section llB substituted by Act 4 of 1979 w.e.f. 7th
April, 1979, the liability to pay interest accrues (a) where the dealer has
furnished returns but has failed to pay the tax as per the said rel ur_ns or
\vithin the time allowed; (b) \Vhcre a dealer has furnished a revised return
under section 7(3) whereunder the amount of tax payable is larger than G
that already paid; ( c) where a dealer has filed his return after expiry of the
prescribed period but has not paid the tax as per return or within the time
allowed; (d) where a dealer is required to pay lax without furnishing a
return for any period and such tax is not paid in full by the due date; (e)
where a dealer required to furnish returns pays tax for any period without
H
972 SUPREME COURT REPORTS IJ994] 3 S.C.R.
A furnishing returns; and (f) where the liability to pay t~ is quantified in
A
r-<
respect of a dealer who had submitted returns for the period for which the
tax is quantified. It will thus be seen that under section llB before the 1979
amendment the liability to pay interest on unpaid tax amount accrued on
the dealer in two situations only, viz., (i) failure to pay the tax due under
sub-sections (2) and (2A) of section 7 and (ii) failure to pay the tax within
B the time allowed by the notice pf demand or thirty days from the receipt
of the notice by the dealer. Section llB before its amendment nowhere
provided for payinent of interest on the unpaid tax amount as found on
final assessment from 5he date of the filing of the return under section 7 ~
of the Act. If the amount of tax payable under sub-section (2) is paid on
the basis of return, not on the basis of final assessment, there can be no
c question of payment of interest under· clause (a) of section llB. Similarly,
if the tax is paid according to the return as required by sub-section (2A),
in ·other words, if the full amount of tax due 'shown' in the return is paid,
there can be no question of charging interest under clause (a) of section
llB. So far as clause (b) is concerned it is a post-assessment situation.
Where tax is found due on final assessment and the dealer is required to
D make good the difference, a notice of demand will issue. If the dealer fails ,
to pay the tax within the time specified in the notice, and if no time is
specified within 30 days from the receipt of notice, he is required to pay >
interest at the rates prescribed by the sub-section. But if he pays the
difference of tax within the prescribed time there is no question of charging
E interest. If such an interpretation is not placed and if the Revenue's plea
is accepted serious anomalies would surface. Firstly, if the liability to pay
interest on the balance tax amount accrues from the date of submission of
returns under section 7, clause (b) of section llB read with section 11(2)
would be rendered nugatory. Otherwise one would be required to hold that
interest would be payable from the date of submission of the return till the
F date of issuance of notice of demand and thereafter no interest would have ..
to be paid till the expiry of the specified p~riod or thirty days, as the case
may be, and thereafter interest would have to be paid at a given rate for
the first three months and thereafter at a higher rate. Such could not be
· the legislative intent. Secondly, take the case of a dealei who has failed to
submit a return and is subjected to assessment of tax on the basis of best
G judgment. Pursuant to the said assessment he deposits the tax. Such a
dealer would not be liable to pay interest on the balance tax if the tax
assessed under section 10 is higher thaa what was provisionally assessed.
He can always claim that he cannot be made liable to pay interest for the
error of the authority in making the provisional assessment under section ~-
7A. The defaulter would be in a better position than a dealer who complies
H
}
'
J.K SYNTHETICS v. COMMERCIAL TAXES OFFICER [AHMADI, J.] 973
with the requirement of section 7(1). And if he can show reasonable cause, A
he would also escape the penalty clause in sections 7AA & 16(1). More or
less a similar situation may arise in the matter of payment of interest
wherL; provisional assessment is made under section 78. (Jfcourse such a
dealer may become liable to penalty but that is a difforent matter al-
together. Take also Lhe case of a dealer who submits a return without
depositing the tax on the basis thereof. Under Rule 25(4) the authority may B
or may not take cognizance of the return. If cognizance is not taken the
dealer would be treated on par with one who has not submitted a return
but if cognizance is taken he must be treated as one who is liable to pay
interest under clause (a) of section llB of the Act. Therefore, the-view
Canvassed by the Revenue leads to incongruou.S situations which can never
be the legislative intent. This is how the situation emerges on a plain c
reading of the provisions of the Act as they stood before Act 4 of 1979
came into force. After the substitution of section llB by Act 4 of 1979 the
situation has changed altogether. What we have said earlier has nothing to
do with section 11B as introduced by Act 4 of 1979. We may now examine
the case la\V on which reliance was placed.
D
• The decision rendered by the Constitution Bench of this Court in the·
case of Ghasi Lal (supra) turned on the following facts. The Act had come
into force on 1st April, 1955 while the Rules framed therkunder were
published in the Rajasthan Government Gazette on 28th March, 1955.
Ghasi Lal challenged the making of assessments on his turnover for the E
year 1955-56 on the ground that-the Rules were invalid. The High Court
in the writ petition filed by Ghasi Lal made an interim order on 9th
January, 1958 that Ghasi Lal will maintain proper accounts and fiie the
prescribed returns and the Revenue \Vill not assess him till further orders.
During the pendency of the writ petition the Rules were validated by F
_J
Ordinance No. 5 of 1959 (which later became an Act). Thereupon Ghasi
Lal withdrew his writ petition. Thereafter on 4th December, 1959, the Sales
Tax Officer, Kotah City Circle, sent hin1 a sho\v cause notice' asking him
to deposit ihc tax due upto date \vi thin a \Vcck) failing \vhich he thrcateneJ
to take necessory action pcrmissibll; in law. ()n receipt of the notice Ghasi
Lal filed a retrun.in respect of the 4th quarter ending on 22nd October,
G
1957 and deposited the tax of Rs. 11,808.37. On 25th April, 1960, the Sales
Tax Officer madC an assessment in respect of the- accounting period f;~_m
3rd November 1956 to 22nd October, 1957 and imposed a penalty under
section 16(1)(b) of the Act on the ground that the assessee had not
H
974 SUPREME COURT REPORTS (1994] 3 S.C.R.
A deposited the tax for the earlier quarters on the due dates and the tax for
the 4th quarter was deposited after a lapse of two years. His appeal was
dismissed by the Deputy Commissioner of Sales Tax who endorsed the view
that the interim order of the High Court had not precluded the assesscc
fro\" paying the tax and filing the returns. On the same line of reasoning
B penalty was also levied for the subsequent periods. Ghasi Lal challenged
the levy of penalty by a writ petition and the High Court allowed the same.
It may be noted that section 7AA was not on the statute book then and
the penalty was levied under section 16(l)(b) as it then stood which illlcr
alia provided for imposition of penalty if the tax due was not pijid within
the time allowed. The submission made on behalf of Ghasi Lal was that
c there was no breach of section 16(1)(b) inasmuch as no tax was due till the
assessee filed his returns under section 7 (1) of the Act because the tax to
be deposited as required by section 7(2) was to be calculated on the basis
of the return. There cannot be non-compliance of section 7(2) unless a
return is filed without depositing the tax due on the basis of the return.
D Hence, counsel contended, there was no violation of section 7(2) and so
long as the tax was not assessed and determined as required under section
10, the liability for payment of penalty did not arises. On the other hand ,
the Revenue contended that the liability to pay tax had arisen under
sections 3 and 5 of the A.ct and the delay in complying with the demand
E notice entailed imposition of penalty. This Court held :
"According to the terms of section 161(1)(b), there must be tax
due and there must be a failure to pay the tax due within the time
allowed.................... Section 3, the charging section, read with
section 5, makes tax payable, i.e. creates a liability to pay tax. That
F is the normal function of a charging section in a taxing statute. But
till the tax payable is ascertained by the assessing authority under •
section 10, or hy the assessee under section 7(2), no tax can be
said to be due within section 16(1 )(b) of the Act, for till then there
is only a liability to be assessed to tax.''
G
The situation may be different after the i-Q_~ction of section 7A. The
contention based on the show cause notice was brushed aside as one
\Vithout substance as the learned counsel for the Revenue \Va.s unable to
sho\V any rule or section under \vhich it was issued. On this line of
H reasoning this Court upheld the High Court decision and dismissed the
.J.K. SYNTHETICS v. COMMERCIAL TAXES OFFICER [AHMADI.].) 975
appeal. A
Before we proceed further we must emphasise that penalty
provisions in a statute have to be strictly construed and that is why we have
pointed out earlier that the considerations which may weigh with the
authority as well as the Court in construing penal provisions would be
different from those which would weigh in construing a provision providing B
for payment of interest on unpaid of tax which ought to have been paid.
Section 3, read with section 5 of the Act, is the charging provisions \Vhereas
the rest of the provisions provide the machinery for the levy and collection
of the tax. In order to ensure prompt collection of the tax due certain penal
provisions are made to deal with erring dealers and defaulters and these c
provisions being penal in nature would have to be construed strictly. But
the machinery provisions need not be strictly construed. The machinery
provisions must be so construed as would enable smooth and effective
collection of the tax from the dealers liable to pay tax under the statute.
Section llB provides for levy of interest on failure of the dealer to pay tax
due under the Act and within the time allowed. Should this provision be D
• strictly construed or should it receive a broad and liberal construction, is
a question which we will have to consider in determining the sweep of the
said provision. We will do so at the appropriate stage but for the present
we may notice the thrust of this Court's decision in the case of Associa-
tioned Cement Co. Ltd. (Supra). E
That was a case in which the Company had submitted its returns
under the Act as well as the Central Act for the period between lst August,
1973 and 31st July, 1974 accompanied by receipts evidencing the payment
of tax on the basis of the said returns. the freight charges were, however,
not included in the taxable turnover on the plea that the said charges were F
not liable to be so included. However, after the decision of this Court in
Hindustan Sugar Mills Ltd., revised returns including the freight charges
were filed along with receipts evidencing the deposit of the balance tax
amount under both the !-.latutes. In the assessment order 111a<le under the
Act the authority imposed penalty under section 7AA and levied interest G
under section 11B of the Act for the delay in depositing the tax amount
rclatablc lo the fright charges. A similar order was made under section 9(2)
of the Central Act. The Company pleaded that it had acted bona fide in
omitting to include the freight charge in its turnover as the view expressed
~- by this Court in Hyderabad Asbestos Company Ltd. held the field till it came
to be explained and distinguished in the subsequent cases of Bir/ii Jute H
976 SUPREME COURT REPORTS 11994] 3 S.C.R.
A Manufactwing Co. Ltd. v. Commissioner of Sales Tax, 29 STC 639 (M.P.)
and Hindustan Sugar Mills Ltd., (supra). The Company also pointed .out
that within two months after the judgment of this Court in the latter case
it had filed revised returns including the freight charges in its taxable
turnover and paid the tax due thereon even before the assessment orders
were made . The three-judge bench which decided the case was unanimous
B in its view that the Company had acted bona fide in omitting to include the
freight charges in its taxable turnover and, therefore, the levy of penalty
under section 7AA of the Act was not sustainable. However, the· Bench
was divided on the question of liability to pay interest under section UB
of the Act; Sen and Venkataramiah, JJ. taking the view that the levy of
interest was legal and proper while Bhagwati, J. holding that the demand
c was not legally sustainable. It is, therefore, necessary to place into sharp
focus the two points of view to appreciate the rationale in support thereof.
The majority view was expressed by Venkataramiah, J. on behalf of
himself and Sen, J. with which Bhagwati, J. dissented. Venkataramiah, J.
D speaking for the majorily points out that interest claimed on unpaid tax
dues has been described as compensatory in character and not penal.
Dealing with the assessee's contention that as it had deposited the full
amount of tax due on the basis of the returns filed under section 7(1), and
had thereby tomplied with section 7(2), and had subsequently deposited
the additional tax on the basis that freight charges were includable in the
E taxable turnover while submitted the revised return under section 7(3), the
question of charging interest could not arise, Venkat~ramiah, J. observes. :
!Tin the present case if we .coristru~ the words 'on the basis of return'
occurring in sub-section (2) of section 7 of the Act as on the basis
F of a true and proper return which ought to have been filed under
sub-section (1) of section 7 then all the three classes of persons,
viz., (i) those who have not filed any retu:n at all and who are late.r
on found to be liable to be assessed, (ii) those who have filed a
true return but have not deposited the full amount of ta.x \Vhich
they are liable to pay and (iii) those who have filed a return making
G a wrong claim that either the whole or any part of the turnover is
not taxable and who are subsequently .found to have made a wrong.
claim, would be placed in the same position and they would all be
liable to pay interest on the amount of tax which they are liable to
pay but have not paid as required by sub-section (2) of section 7
Hr of the Act. We are of opinion that this viev.' iS in conformity v.'ith
J.K. SYNTHETICS v. COMMERCIAL TAXES OFFICER [AHMADI. J.] 977
the legislative intention in enacting section l 18 of the.. Act." A
Referring to the Constitution Bench _judgment in the case of Ghasi Lal, the
learned Judge observes that the said decision was distinguishable because
it related to the sustainability of the penalties imposed under section 16(1)
of the ·Act and not interest levied under section llB of the Act and
secondly because section 16(l)(b) was attracted when there was a failure B
to pay the 'tax due', an expression not employed by section llB of the Act.
The learned Judge also points out that if sectioos 7 and llB are not
interpreted in manner indicated in the above-quoted passage, (i) a
registered dealer who does not file a return and pays no tax (ii) a registered
dealer who files a true return but does not pay the full amount of tax and
(iii) a registered dealer who files a return but wrongly claims either the
c
· whole or any part of the turnover a~ not taxable and pays under section
7(2) only that much amount of tax as he considers payable on the basis of
the return, will escape the net of section llB and render the provision
either unworkable or meaningless and, therefore, it is essential, on a fair
reading of section llB, to hold that the law expects that all those liable to D
)
pay tax should file a 'true return' within the. time allowed. The learned
Judge co.ncludes by saying 'we do not think ................ .we have in any way
disregarded the decision in Ghasi Lat's case' and emphasise 'we have to
state that we depend upon Ghasi Lal's case itself to hold that for the
purpose of section llB( a) the tax becomes payable before assessment is
made by virtue of section 3 read with section 5 and sub-sections (2) and E
(2A) of section 7 of the Act and the rules framed thereunder, even though,
· it becomes du~ when return is filed under section 7(2) or ascertained under
section 10. On this line of reasoning the majority upheld the demand made
under section UB of the Act.
F
Bhagwati, J. after referring to sections 3, 7, JO, 11 and llB of the
j Act, points out that se.crion 7(2) speaks of 'full amount of tax due on the
basis of the return' . and adds :
"We must look at the return actually filed by the assessee in order
to see what is the full amount of tax due on the basis of such return. G
It is not the assessed tax nor is it the tax due on the basis of a
return which ought to have been filed by the assessee but it is the
tax due according to the return actually filed that is payable under
sub-section (2) of section 7. This provision is really in the nature
' of self-assessment and what it requires is that whatever be the H
978 SUPREME COURT REPORTS [1994] 3 S.C.R.
A amount of tax due on the basis of self-assessment must be paid up
along with the filing of the return which constitutes self-assessment.
I fail to see how the plain words of sub-section (2) of section 7
can be tortured to mean full amount of tax due on the basis of
return which ought to have been filed but which has not been filed."
B Pointing out that the construction pressed by the Revenue leads to a
serious anomaly, the learned Judge proceeds to observe :
"If this construction were accepted, the tax payable under sub-sec-
tion (2) of section 7 would be the full amount of tax due on the
c basis of a correct and proper return and that would necessarily be
the same as the tax assessed by the assessing authority, because
what is the correct and proper return would be determinable only
with reference to the assessment ultimately made. The assessment
when made would show whether the return filed was correct and
proper; it would be correct and proper if it accords with the
D
assessment made; if it does not accord with the assessment, the'n
to the extent to which it differs it would obviously have to be
regarded as incorrect and improper. The consequence of the
construction suggested on behalf of the revenue would thus be that
the tax payable under sub-section (2) of section 7 would be the
E full amount of the tax as assessed because that would represent
the tax due on the basis of a correct and proper return and the
assessee would have to deposit at the time of filing the return an
alilount equivalent to the amount of the tax as assessed. If the
assessee fails to do so then apart from th~ liability to pay interest
F under section llB, clause (a), the assessee would expose himself
to penalty under section 16, sub-section (1), clause (n) ........ The
Legislature could never have intended that the assessee should be
liable, on pain of imposition of penalty, to deposit an amount which
is yet to be ascertained through assessment. 11
G The learned Judge then proceeds to state tliat if the construc;ion canvassed
by the Revenue is accepted it would lead to a conflict between two sections,
in that, the assessee would be liable to pay interest on the completion of
the assessment from the date of filing of the return till payment of the tax
amount, while under section llB(b) the assessee would be liable to pay
H interest on the amount of the tax assessed after the expiry of the period
J.K. SYNTHETICS v. COMMERCIAL TAXES OFFlCER [AHMADl,J.] 979
specified in the notice of demand or thirty days from the date of service A
of the notice if no period is specified in the notice. Invoking the well settled
rule of interpretation that a statute must be so constA·ued as to avoid a
conflict or repugnance between its different provisions, the learned Judge
observes :
"The only way in which clauses (a) and (b) of section llB can be
B
read harmoniously and full meaning and effect can be given to
them is by construing them as dealing with distinct matters or
situations. The tax payable under sub-section (2) of section 7 dealt
with in clause (a) of section llB cannot, therefore, be equated with
the amount of the tax assessed forming the subject-matter of clause c
(b) of Section UB and hence it must be held to be tax due on the
basis of the return actually filed by the assessee and not on the
basis of a correct and proper return which ought to have been filed
by him."
D
Next, the learned Judge finds it difficult to understand how the tax which
i-; yet to be ascertained through the process of assessment can be made
payable by the assessee from the date of submission of the return. If it is
so payable it is equally difficult to understand why it should bear interest
from the date of filing of the return upto the date of assessment only and E
thereafter be free from the liability to bear interest upto the period
specified in the notice of demand and if no such period is specified till the
expiry of thirty days from the date of service of the notice. The learned
Judge, therefore, concludes that the scheme of taxation under the Act
clearly envisages that it is only when the assessment is made and the period
specified in the notice of demand or thirty days, as the case may be, expires
F
that the amount of tax us assessed becomes payable and if the same is not
paid within a time allowed, the liability to pay interest thereon accrues.
What becomes payable under section 7(2) is only the tax due on the basis
of the return actually filed i.e., on the basis of self-assessment and there-
after the difference in tax on assessment, if the tax assessed is more than G
the tax deposited on self-assessment. Lastly, the learned Judge holds that
the decision rendered in the case of Ghasi Lal applies on all four and in
the face of the ratio laid down in that case it is impossible to accept the
view point of the Revenue. With regard to the three instances mentioned
by Venkataramiah, J. the learned Judge points out that in such cases H
980 SUPREME COURT REPORTS [1994] 3 S.C.R.
A penalty can· be imposed under section 16 of the Act. On this line of
reasoning the learned Judge disagreed with the majo_rity view.
. It is well-known that when a statute levies a tax it does so by inserting
a charging section by which a liability is created or fixed and then proceeds
to provide the machinery to make the liability effective. It, therefore,
B
provides the machinery for the assessment of the liability already fixed by
the charging section, and then provides the mode for the recovery and
collection of tax, including penal provisions meant to deal with defaulters.
Provision is also made for charging interest on delayed payments, etc.
Ordinarily the charging section which f=s the liability is strictly construed
c but that rule of strict construction is not extended to the machinery
provisions \vhich are construed like any other statute. The machinery
provisions must, no doubt, be so construed as would effectuate the object
and purpose of the statute and not defeat the same. (See Whitney v.
Commissioners of Inland Revenue, 1926 Appeal Cases 37, CIT v.
D Mahaliram Ramjidas, (1940) 8 lTR 442 (P.C.), Indian United Mills Ltd. v.
Commissioner of Excess Profits Tax, Bombaj, (1955) 1 SCR 810 and
Gursahai Saigal v. CIT, Punjab, [1963] 3 SCR 893. But it must also be
realised that provision by which the authority is empowered to levy and
co11ect interest even if construed as forming part of the machinery
provisions, is substantive law for the simple reason that in the absence of
E contract or usage interest can be levied under law and it cannot be
recovered by way of damages for wrongful detention of the amount. (See
Bengal Nagpur Railway Co. Ltd., v. Ruttanji Ramji, AlR (1938) P.C. 67 and
Union of India v. A.L. Rallia Ram, [1964] 3 SCR 164 at 185-190. Our
attention was, however, drawn by Mr. Sen to two cases. Even in those cases,
F C.I. T., A.P. v. M. Chandra Sekhar, (1985)) 155 ITR 43~ and Central Provin-
ces Maganese Ore Co. Ltd. v. C.l.T., (1986) 160 !TR 961, all that the Court
pointed out was that provision for charging inter"est was, it seems, intro-
duced in order to compensate for the loss occasioned to the Revenue due
to delay. But then interest was charged on the strength of a statutory
provision, may be its objective was to compensate the Revenue for delay
G in payment of tax. But regardless of the reason which impelled the legisla-
ture to provide for charging interest, the Court must give that meaning to
it as is conveyed by the lar.guage used and the purpose to be achieved.
Therefore, any provision made in a statute for charging or levying interest
on delayed payment of tax rriust be construed as a substantive law and not
H adjectival law. So construed and applying the normal rule of interpretation
t
J.K. SYNTHETICS v. COMMERCIAL TAXES OFFICER [AHMADI, J.J 981
of statutes, we fi_nd, as pointed out but us earlier and by Bhagwati 1 J. in the A
Associated cenzent Company's case, that if the Revenue's contention is
accepted ~t 1eads to conflicts and creates certain anomalies which could
never have been intended by the legislature.
Let us look at the question from a slightly different angle. Section B
7(1) enjoins on every dealer that he shall furnish prescribed returns for the
prescribed period within the prescribed time to the assessing authority. By
the proviso the time can be extended by not more than fifteen days. The
requirement of section 7(1) is undoubtedly a statutory requirement. The
prescribed return must be accompanied by a receipt evidencing the deposit
of full amount of 'tax due' in the state Government on the basis of the C
return. That is the requirement of section 7(2). Section 7(2A), no doubt,
permits payment of tax at shorter intervals but the ultimate requirement is
deposit of the full amount of 'tax due' shown in the return. When section
llB(a) uses the expression 'tax payable under sub-sections (2) and (2A) of
section 7', that must be understood in the context of the aforesaid expres- D
sions employed in the two sub-sections. Therefore, the expression 'tax
payable' under the said two sub-sections is the full amount of tax due and
'tax due' is that amount which becomes due ex-hypothesi on the turnover
and taxable turnover 'shown in or based on the return'. The word 'payable'
is a descriptive word, which ordinarily means 'that which mu.st be paid or
is due, or may be paid' but its correct meaning can only be determined if E
the context in which it is used is kept in view. The word has been frequently
understood to mean that which may, can or should be paid and is held
equivalent to 'due'. Therefore, the conjoint reading of sections 7(1), (2)
and (2A) and llB of the Act leaves no room for doubt that the expression
'tax payable' in section llB can only mean the full amount of tax which F
becomes due under sub-sections (2) and (2A) of the Act when assessed on
the basis of the information regarding turnover and taxable turnover fur-
nished or shown in the return. Therefore, so long as the assessee pays the
tax which according to him is due on the basis of information supplied in
the return filed by him, there would be no default on his part to meet his
statutory obligation under section 7 of the Act and, therefore, it would be G
difficult to hold that the 'tax payable' by him 'is not paid' to visit him with
the liability to pay interest under clause (a) of section UB. It would be a
different matter if the return is no approved by the authority but that is
not the case here. It is difficult on the plain language of the section to hold
that the law envi.sage.s the assessee to predicate the final assessment and H
982 SUPREME COURT REPORTS [1994] 3 S.C.R.
A expect him to pay the tax on that basis to avoid the liability to pay interest.
That would be asking him to do the near impossible.
The learned counsel for the Revenue placed strong reliance on the
decision of this Court in Kesoram Industlies & Cotton Mills Ltd. v. Com-
B
missioner of Wealth Tax (Central) Calcutta, [1966] 2 SCR 688. Reference
was to the discussion on the third question, namely, whether the assessee
owned a 'debt' on the valuation day within the meaning of section 2(m) to
.
be deductible in computing the net wealth of the assessee. In that case the
assessee had in the accounts for the year ending 31st March, 1957, shown
a certain amount as provision for payment of income tax and super tax.
C The majority answered the question in the affirmative whereas the third
learned judge disagreed. In the view we are taking on the relevant
provisions of the Act it is unnecessary for us to examine the merit or
demerit of the rival views.
In the result we are of the view that the majority opinion expressed
D by Venkataramiah, J. in the Associated Cement Company's case does not,
with respect, state the law correctly and in our view the legal position was
correctly stated by Bhagwati, J. in his minority judgment. We, therefore,
overrule the majority view in that decision and affirm the minority view as •
laying down the correct law. We must make it clear to avoid any possibility
E of doubt in future that our view is based on the law as it stood before the
amendments effected by Act 4 of 1979. Reference to the provisions of law
after the amendments by Act 4 of 1979 are if at all for the limited purpose
of comparison and we should not be understood to have expressed any
view in regard to them.
I
'
F The appeals/writ petition are allowed and the amount of interest (
.)_
levied and collected from the appellants/petitioners by virtue of section UB
of the Act as well as Central Act shall be refunded to the appel- I-'
lants/petitioners within three months from today with interest at 12% per '
~~
cent per annum from the date of actual recovery from the appellants till
G payment. There will, however, be no order as to costs in the facts and
circumstances of the case.
'
.t:
t
C.M.P. No. 10858177 is disposed of.
V.S.S. Appeal allowed.
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