REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4277 OF 2002

Bhai Jaspal Singh and Anr.         _____          Appellants

Versus

Assistant Commissioner of Commercial Taxes and Ors.                                    _____       Respondents

J U D G M E N T

H.L. Dattu, J.

1) This appeal is directed against the Judgment and Order passed by  

the High Court of Calcutta in W.P.T.T. No. 102 of 2000 dated  

14.09.2001.  

2) The issues which require our consideration and decision in this  

appeal are: the meaning of the expression ‘Investment’ for the  

purpose of notification issued by the State of West Bengal under  

West  Bengal  Sales  Tax Act  and the  corresponding  Rules;  the  

construction and interpretation of an exemption notification; and  

whether the interest is payable on tax only on quantification of  

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tax by way of assessment under the Act or for any period prior to  

that.    

3) The material facts are :-

The assessee is M/s Tulip Products Co., a partnership firm having a  

fruit processing unit at 37, Imjad Ali Lane, Calcutta.  It is a small  

scale  industrial  unit.  The Unit  is  engaged in manufacturing juice,  

jelly, jam etc.  The unit was registered as a dealer under the Bengal  

Finance (Sales Tax) Act, 1941 (hereinafter to be referred as “the Act,  

1941”),  the  West  Bengal  Sales  Tax  Act,  1954  (hereinafter  to  be  

referred as “the Act, 1954”), and was later registered under the West  

Bengal Sales Tax Act, 1994 (hereinafter to be referred as “the Act,  

1994”).

4) The relevant assessment periods are 01.04.1995 to 30.04.1995 and  

01.05.1995  to  31.03.1996.   In  the  returns  filed  for  the  aforesaid  

period, the assessee claimed exemption from payment of sales tax  

mainly  relying  on  the  exemption  notification  issued  by  the  State  

Government bearing No. 1428-F.T. dated 26.05.1994 and Rule 41 of  

West Bengal Sales Tax Rules,  1995 (hereinafter to be referred as  

“the 1995 Rules”).  According to the assessee, its investment in plant  

and  machinery  in  its  unit  during  the  period  from  01.04.1995  to  

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30.04.1995  and  from 01.05.1995  to  31.03.1996  was  less  than  `5  

lakhs and accordingly, it was entitled to get the tax exemption under  

Rule 3(116) of the Bengal Sales Tax Rules, 1941 (hereinafter to be  

referred as “the 1941 Rules”) for the first period and by virtue of the  

notification dated 26.05.1994 and  Rule 41 of the 1995 Rules for the  

second  period.   The  Asst.  Commissioner  of  Commercial  Taxes  

passed an order of assessment for both the periods disallowing the  

assessee’s claim for exemption from payment of sales tax and also  

levied interest as provided under Section 10A of the Act, 1941 and  

Section 31 of the Act, 1994.  In the view of the Tax Officer, the  

benefit of exemption from payment of sales tax cannot be granted  

since the assessee does not fulfill all the conditions prescribed in the  

notification granting exemption from payment of sales tax and also  

the  conditions  specified  in  Rule  41  of  the  1995  Rules.   The  

Assessing Officer took the book value of the plant and machinery as  

on 31st March, 1980 at  `2,27,148.78/- and after the addition made  

from 1981 to 1986-1987, took the value of investment of plant and  

machinery for the assessment year 01.05.1995 to 31st March, 1996 as  

`6,58,587/- for the purpose of assessment under the Act 1994 along  

with  an  assessment  for  the  broken period  between  01.04.1995  to  

30.04.1995.  

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In appeal, the assessment order passed by the Tax Officer was  

confirmed by the Deputy Commissioner, Commercial Taxes.  The  

assessee  filed  Second  Appeal  before  the  West  Bengal  Sales  Tax  

Tribunal.  The Tribunal has confirmed the order passed by the First  

Appellate Authority.   In the writ petition filed, the High Court of  

Calcutta confirmed the order passed by the Tribunal in exercise of its  

writ jurisdiction.   

5) The  learned  senior  counsel  Sri  A.  K.  Ganguli  for  the  assessee  

submits that the term “investment” used in the Notification refers to  

the  actual  value  of  the  machinery  after  allowing  depreciation  as  

distinct  from  the  cost  of  acquisition  of  such  machinery.  

Alternatively, it is submitted that though the initial value of the plant  

and machinery was more than  `5 lakhs,  on account of successive  

yearly  depreciation  in  their  value,  the  total  value  of  plant  and  

machinery  was  less  than  `5 lakhs  during the  relevant  assessment  

periods  and,  therefore,  appellant’s  Small  Scale  Industrial  Unit  is  

eligible  for  exemption  from  payment  of  tax  in  view  of  the  

notification issued by the State Govt. and also under the Rules.  The  

learned senior counsel would further contend that the purport and  

intent  of  the  Notification  would  be  frustrated  if  such  liberal  

construction is not taken, and if costs of repairing, overhauling and  

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minor modification were included in investment on cost of plant and  

machinery,  naturally  the investment  made in plant  and machinery  

would  go  beyond  the  prescribed  limit  and  that  cannot  be  the  

intention of the State Government while issuing notification granting  

exemption to Small Scale Industrial Units.  He also submitted that a  

liberal  construction  should  be  adopted  while  interpreting  the  

exemption notification as the purpose is to encourage Small Scale  

Industrial Units.  It is also contended by the learned counsel that the  

interest  payable  on  tax  due  shall  become  payable  only  on  

quantification of amount of tax by way of assessment and service of  

demand notice and not for the period prior to that.   

6) The  learned  senior  counsel  Sri.  M.  Chandrasekharan  for  the  

respondent  ably  justifies  the  impugned  Judgment.   The  learned  

senior counsel submits that in considering the “investment” in plant  

and  machinery  of  an  industrial  unit  for  the  purpose  of  the  

notification and also the Rules, the depreciation in the value of such  

plant  and  machinery  cannot  be  taken  into  account.   It  is  also  

contended  that  the  liability  to  pay  interest  under  the  Act  

automatically arises, if a dealer fails to pay any amount of tax due  

under the Act.

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7) In  order  to  appreciate  the  rival  submissions  made by  the  learned  

senior counsel,  we need to notice the statutory provisions and the  

notification issued by the State Govt. Rule 3(116) of the 1941 Rules  

reads as under :-

“116) [Sales by a dealer of- (a) (i)  jam,  (ii)  jelly,  (iii)  marmalade  (iv)  pickle  (v)   

amsatta  (vi)  chutney  (vii)  Kasundi  (viii)  ….(ix)   ketchup  

(b) Vinegar made from fruits or vegetables. (c) (i) fruit pulp and (ii) fruit peels (d) Processed fruits, that is to say, candied, crystallized   

or  glaced  fruits,  but  excluding  the  notified   commodities covered by this department notification   No. 2252 dated the 9th June, 1969, as subsequently   amended.   

(e) (i) vegetable pulp (ii) vegetable peels (iii) juice and  (iv) vegetable sarbat.  

When the goods mentioned in (a) (b) (c) (d) or (e) are   manufactured in his small scale industrial unit in West   Bengal]

Provided  that  the  small  scale  industrial   unit  is  registered with the Directorate of  Cottage and  Small Scale Industries of Government of West Bengal,   and investment by the dealer in Plant and Machinery of   such unit is less than  `5 lakhs.”     

8) In exercise of the power conferred by Section 4AA of the Act, 1954,  

the State Government has issued Notification No.1428 - F.T. dated  

26th May, 1994.  The Notification is as under:  

“Registered No. WB/SC-247 No.WB (Part-I)/94/SAR-122 The

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Calcutta Gazette             Extraordinary                  Published by Authority

______________________________________________ JAYISTHA 5]        THURSDAY, MAY 26, 1994      [SAKA   1916 ______________________________________________

PART-I  – Orders  and Notifications  by  the Governor of   West Bengal, the High Court, Government Treasury, etc.

GOVERNMENT OF WEST BENGAL FINANCE DEPARTMENT

TAXATION No.1428- F.T.  Calcutta, the 26th May,   1994

              NOTIFICATION

Whereas the Governor is satisfied that it is necessary so   to do in the public interest; Now, THEREFORE, in exercise of the power conferred by  section 4AA of the West Bengal Sales Tax Act, 1954  (West Bengal Act IV of 1954) (hereinafter referred to as  the said Act), the Governor is pleased hereby to direct   that no tax shall be payable under the said Act on sales by  a dealer of –

a) (i) fruit juices, (vii) fruit syrups, (viii) fruit concentrates, (ix) fruit squashes, (x) fruit cordials, and  (xi) fruit sarbat,

including in this department notification no.3945 –  F.T., dated the 26th August, 1977, as subsequently   amended;

b) canned,  bottled  or  any  other  preserved  fruits,   included in this department notification No. 2252- F.T.,   dated the 9th June, 1969;

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c) processed food, commonly known as instant food,   that  is  to  say,  pre-cooked  or  curried  vegetable,  and  vegetable  soup,  included in  this  department  notification  no.1036  F.T.,  dated  the  31st March,  1988,  when  the  notified  commodities  mentioned  in  (a),  (b)  or  (c)  are   manufactured in his  small  scale  industrial  unit  in West   Bengal  registered  with  the  Directorate  of  Cottage  and  Small Scale Industries of the Government of West Bengal   and the investment by the dealer in plant and machinery   of such unit is less than five lakh rupees.

This notification shall come into force on and from the 1st  day of June, 1994.

     By order of the Governor S. MITRA

          Jt. Secy. to the Govt. of West Bengal”

9) With a view to encourage Small Scale Industrial Units and to step up  

economic growth by promoting development of these industries in  

the State, the West Bengal State Govt. decided to grant exemption  

from payment of sales tax to certain Small Scale Industrial  Units.  

To  achieve  that  object,  it  issued  notification  No.1438-FT  dated  

26.05.1994 in exercise of the powers conferred by Section 4AA of  

the  Act,  1954,  granting  exemption  from payment  of  sales  tax  on  

sales by a dealer of fruit juices, fruit concentrates, fruit cordials and  

fruit sarbat, canned, bottled or any preserved fruits (goods included  

in  Notification  No.  2252-F.T.  dated  09.06.1969)  and  the  goods  

included  in  Notification  No.  1036-F.T.  dated  31.03.1988.   In  the  

Notification,  it  is  further  specified  that  the  goods  mentioned  in  

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Column (a), (b) or (c), are manufactured in a Small Scale Industrial  

Unit in West Bengal registered with the Directorate of Cottage and  

Small  Scale  Industries  of  the  Govt.  of  West  Bengal  and  the  

investment by the dealer in plant and machinery of such unit is less  

than `5 lakhs.

10) Section 104 of the Act, 1994 grants power to the State Government  

to make rules, with prospective or retrospective effect, for carrying  

out the purposes of the Act.  In exercise of the power so conferred,  

the State Government has framed Rule 41 of the 1995 Rules.  The  

Rule provides for exemption from tax on sales of certain fruit and  

vegetable products etc. manufactured in Small Scale Industrial Units  

in West Bengal.  The Rule is as under :-

“Exemption from tax  on sales  of  certain  fruit  and  vegetable products etc. manufactured in small-scale   industrial  units  in  West  Bengal  –  Where  a  dealer   makes sales of –  (i) fruit  product,  that is to say, fruit  juice, fruit   

syrup,  fruit  concentrate,  fruit  squash,  fruit   cordial, fruit sarbat, fruit jam, fruit jelly, fruit   marmalade,  fruit  pickle,  amsatta,  chutney,   kasundi, fruit sauce, ketch up, fruit pulp, fruit   peel,

(ii) processed  fruit,  that  is  to  say,  candied,   crystallized or glaced fruit,

(iii) caned, bottled or any other preserved fruit, (iv) processed food,  commonly known as instant   

food,  that  is  to  say,  pre-cooked  or  curried  vegetable and vegetable soup,  

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(v) vegetable  product,  that  is  to  say,  vegetable  pulp,  vegetable  peel,  vegetable  juice,   [vegetable  sauce,  vegetable  pickles]  or   vegetable sarbat,  manufactured  in  his  small-scale  industrial   

unit in West Bengal, registered with the Directorate   of Cottage and Small-Scale Industries, Government   of West Bengal and where investment by such dealer   in plant and machinery of such unit is less than five  lakh  rupees,  such  dealer  may  deduct  such  sales   under sub-clause (xi) of clause (a) of sub-section (3)   of section 17 from his gross turnover of sales.”

11) Section  2  of  the  Act  is  the  interpretation  clause.   Clause  (b)  of  

Section 2 defines ‘dealer’. Section 4 is the charging Section. Section  

4AA  empowers  the  State  Government  to  grant  exemptions  or  

reductions in rate of tax on the sale or purchase of goods by a dealer  

or category of dealers to be specified in any notification to be issued  

by the State Government in the pubic interest.  The scheme of the  

Rules  and  the  notification  issued  by  the  State  Government  in  

exercise of the power under Section 4AA of the Act, 1954, is that the  

commodities specified in the Notification must be manufactured by a  

Small  Scale Industrial Unit  in West Bengal,  it  must be registered  

with the Directorate of Cottage and Small Scale Industries of the  

Government of West Bengal; and the investment by dealer in plant  

and  machinery  of  such  unit  must  be  less  than  `5  lakhs.   These  

exemptions are also provided in Rule 3(116) of the 1941 Rules and  

Rule 41 of the 1995 Rules.  These Rules speak of exemption from  

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payment of tax on sales of certain fruits and vegetable products etc.  

manufactured  in  small-scale  industrial  units  in  West  Bengal  and  

investment in plant and machinery should not exceed `5 Lakhs.   

12) We will now consider the contentions raised by the learned senior  

counsel for the parties to the lis.   

                    Contention (a):-   

13) The  expression  “investment”  in  the  notification  is  the  main  

controversy  in  this  appeal.   The  assessee  claims  that  the  word  

“investment” requires to be understood as the investment made by a  

Small  Scale Industrial Unit after giving depreciation on plant and  

machinery.   According  to  the  Assessing  Authority,  even  after  

allowing such a claim, which in our opinion, is not the correct way  

of  understanding  the  expression,  the  investment  is  more  than  `5  

lakhs and, therefore, the assessee is not eligible for exemption from  

payment of sales tax.

14) In common parlance, the term  “investment” has been defined as “a  

thing worth buying because  it  may be profitable  or  useful  in  the  

future”  (Oxford  English  Dictionary,  11th edition,  2004)  or  as  the  

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“placing of money to gain profit” (Bloomsbury English Dictionary,  

Reprint, 1985).

15) Speaking of investment in the context of the Income Tax Act, 1961,  

this  Court  observed in  Commissioner  of  Income Tax,  Lucknow v.  

Uttar  Pradesh  Cooperative  Federation  Ltd,  AIR  1989  SC  915,  

quoting P. Ramanatha Aiyar's Law Lexicon (Reprint Edition 1987)  

that:

“The term invest is used in a sense broad enough to  cover the loaning of the money but is not restricted to  that mode of investment or loans made on commercial  paper. The word invest has been judicially defined as  follows:-

To place property in business; to place it so that it will  be  safe  and  yield  a  profit.  It  is  also  commonly  understood as giving money, for some other property  (as) investing funds on lands and houses. Investment  means  in  common  parlance,  putting  out  money  on  interest, either by the way of loan, or by the purchase  of income producing property...” (emphasis supplied)  (Para 9).

16) In Inland Revenue Commissioners v. Desoutter Brothers Ltd, (1946)  

1 All ER 58 (CA), it is stated:

“The word ‘investment’ is not a word of art but has to  be interpreted in a popular sense. It is not capable of  legal definition but a word of current vernacular.  The  words ‘invest’ and ‘investment’ are to be taken in the   business  sense  of  laying out  money  for  interest  and   profit.”

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17) In a slightly different context, following the Desoutter Brothers case,  

it was held in Inland Revenue Commissioners v. Broadway Car Co.   

(Wimbledon) Ltd., [1946] 2 All E.R. 609, that the question whether a  

particular  source  of  income  was  an  investment  or  not  must  be  

decided  as  it  would  be  by  businessmen  according  to  ordinary  

commonsense principles.

18) In  our  view,  for  the  purpose  of  the  Rules  and  the  notification,  

“investment” must be understood according to its common business  

and  commercial  usage.  While  an  exact  definition  to  suit  all  

requirements  will  not  be  appropriate,  but  it  may  be  said  that  

investment in general would be spending money for the purpose of  

acquiring  property  or  commodities  that  in  turn  generate  further  

income.  

19) In the Notification issued by the State Government and the Rules  

framed, the requirement is that the investment made by the dealer in  

plant and machinery in the Small Scale Industrial Unit should be less  

than  `5  lakhs.   It  is  obvious  that  money  spent  on  upgrading  or  

replacing  machinery  is  investment  that  would  increase  the  

productivity  of  the  machinery  and  consequently  generate  further  

income. It would thus be equivalent to acquiring of commodities that  

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generate  further  income.  Furthermore,  there  is  no  question  of  

reducing  depreciation  value,  as  the  determination  is  of  the  total  

money  spent  or  “invested”  in  plant  or  machinery,  and  the  same  

cannot  be  said  to  include  the  value  of  the  machinery  after  

depreciation.  A reading of the Rule or the notification would not  

even suggest that while calculating the value of plant and machinery,  

depreciation  of  those  equipment  will  have  to  be  taken  into  

consideration in computing the valuation of the plant and machinery.  

In our view, in computing the valuation of plant and machinery, only  

the  cost  price/purchase  price  of  the  equipment  invested  by  the  

assessee  will  have  to  be  taken  into  account.   The  expression  

“investment” in plant and machinery is not subject to the impact of  

depreciation  in  the  value  of  plant  and  machinery.   Since  the  

assessee’s investment is more than  ` 5 lakhs before the periods in  

question and since the investment continues to remain unchanged,  

the assessee is not entitled to exemption from payment of sales tax  

either under the Rules or under the notification.   

                     Contention (b):-   

20) The second contention of learned senior counsel for the assessee is  

that  the  Notification  providing  exemption  should  be  liberally  

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construed  having  regard  to  the  purpose  and  object   it  seeks  to  

achieve.

21) The conditions for availing exemptions are generally laid down in  

the notifications granting exemptions.  Sometimes, exemptions are  

grafted in the Rules framed in this behalf.  In Crawford’s Statutory  

Construction,  it  is  stated  that  “Provisions”  providing  for  an  

exemption may be properly construed strictly against the person who  

makes  the  claim  of  an  exemption.   In  other  words,  before  an  

exemption can be recognized, the person or property claimed to be  

exempted must come clearly within the language apparently granting  

the exemption. In our opinion, the principle to be kept in view while  

interpreting exemption notification is that the meaning of the words  

given  in  the  exemption  notification  is  to  be  gathered  from  the  

language  employed  in  the  notification.  Notification  by  which  

exemption or other benefits are provided by the Govt. in exercise of  

its statutory powers normally have some purpose.  Such purpose is  

not to be defeated nor those who may be entitled for it  are to be  

deprived by  interpreting  the  notification which may give  it  some  

meaning other than what is clearly and plainly flowing from it.  

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22) This  Court,  in  the  case  of  Novopan  India  Ltd.,  Hyderabad v.  

Collector of Central Excise and Customs, Hyderabad, 1994 Supp (3)  

SCC 606, has observed :-

“The  principle  that  in  case  of  ambiguity,  a  taxing  statute should be construed in favour of the assessee –  assuming that the said principle is good and sound –  does not apply to the construction of an exception or   an  exempting  provision;  they  have  to  be  construed   strictly. A  person  invoking  an  exception  or  an  exemption provision to relieve him of the tax liability   must establish clearly that he is covered by the said   provision. In case of doubt or ambiguity, benefit of it   must go to the State. This is for the reason explained in  Mangalore Chemicals  and other decisions,  viz.,  each  such exception/exemption increases the tax burden on  other  members  of  the  community  correspondingly.  Once, of course, the provision is found applicable to  him,  full  effect  must  be  given  to  it.”  (emphasis  supplied) (Para 18).

23) The  view  expressed  in  Novopan  India case  (supra)  finds  further  

approval  in  Tata  Iron  and  Steel  Co.  Ltd. v.  State  of  Jharkhand,  

(2005) 4 SCC 272, where the Court observed that:

“Eligibility  clause,  it  is  well  settled,  in  relation  to  exemption  notification  must  be  given  a  strict   meaning.” (emphasis supplied) (Para 45).

And further, in the same case:

“The principle that in the event a provision of fiscal  statute is obscure such construction which favours the  assessee  may  be  adopted,  but  it  would  have  no  application  to  construction  of  an  exemption  notification, as in such a case it is for the assessee to   show that he comes within the purview of exemption.”  (emphasis supplied) (Para 47).

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24) In A.P. Steel Re-Rolling Mills Ltd. v. State of Kerala, (2007) 2 SCC  

725, it is stated :-

“The general principles with regard to construction of  exemption  notification  are  not  of  much  dispute.  Generally, an exemption notification is to be construed   strictly,  but  once  it  is  found  that  the  entrepreneur   fulfils  the  conditions  laid  down  therein,  liberal   construction  would  be  made.”  (emphasis  supplied)  (Para 22).

25) The  aforesaid  principle  is  summed  up  by  this  Court  in  G.P.   

Ceramics Pvt. Ltd. v. Commissioner, Trade Tax, U.P., (2009) 2 SCC  

90 as under :

“It  is  now  a  well  established  principle  of  law  that  whereas eligibility criteria laid down in an exemption  notification are required to be construed strictly, once  it  is  found that  the  applicant  satisfies  the  same,  the  exemption notification should be construed liberally.”  (emphasis supplied) (Para 32).

26) The preamble of the Notification in this case states that “whereas the  

Governor is of opinion that industrial unit is manufacturing certain  

goods in West Bengal which are in need of financial assistance and  

accordingly  it  is  necessary  to  formulate  a  scheme  of  industrial  

promotion  to  assist  such  unit  for  the  purposes  mentioned  

hereinabove”. Clearly, the purpose of this notification is to promote  

industrial  activity  and  development  in  the  State  of  West  Bengal.  

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However, as is clear from the discussed cases, it is a necessary pre-

condition that first the assessee should fall within the clear wording  

of  the  notification.  The  assessee  in  this  matter  falls  outside  the  

parameters of this Notification, since his investment is over `5 lakhs,  

therefore, there is no question of the Notification applying to him.  

Thus,  there  is  no  requirement  of  liberal  construction  as  the  

notification does not apply to the assessee in the first place.   

                     Contention (c):-   

27) The learned senior counsel Sri A.K. Ganguli contended that interest  

on tax can be charged only after quantification of tax liability by the  

Assessing Officer. Therefore, respondent was not justified in issuing  

the demand notice for payment of tax by including interest element.   

28) There  has  been  a  legislative  amendment  incorporating  statutory  

provision for payment of interest even before quantification of tax  

liability  and  service  of  demand  notice  pursuant  to  such  

quantification.   For  ready reference,  we quote  below the  relevant  

Sections.  Section 10-A of the Act, 1941 is as under :-

“S.  1OA  Interest  payable  by  dealer.-  (1)  Where  a   registered  or  certified  dealer  furnishes  a  [return]   referred to in section 10 in respect of any period by   the prescribed date or thereafter, but fails to make full   payment of tax payable in respect of such period by   

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such prescribed date, he shall pay a simple interest at   the rate of two per centum for each English calendar   month of default from the first day of such month next   following  the  prescribed  date  up  to  the  month   preceding the month of full payment of such tax or up   to the month prior to the month of assessment under   section  11  in  respect  of  such  period,  whichever  is   earlier, upon so much of the amount of tax payable by   him according to such [returns] remains unpaid at the   [end of each of such month of default;]

Provided  that  where  such  dealer  admits  in   writing that the amount of tax payable in respect of   such period is an amount which is either more or less   than, what has been originally shown as payable in the   [return] and where the Commissioner is satisfied on   the  point  of  such  admission,  the  interest  shall  be   payable upon so much of the amount of tax payable   according to such admission as remains unpaid at the   [end of each such month of default.]

(2)  Where  a  registered  or  certified  dealer  fails  to  furnish [a return] referred to in section 10 in respect   of  any  period  by  the  prescribed  date  or  thereafter   before the assessment under section 11 in respect of   such period, and on such assessment full amount of tax   payable for such period is found not to have been paid  by him by such prescribed date, he shall pay a simple   interest at the rate or two per centum of each English   calendar  month  of  default  from the  first  day  of  the  month  next  following  the  prescribed  date  up  to  the  month preceding the month of full payment of tax for  such period or up to the month prior to the month of   assessment under section 11 in respect of such period,   whichever is earlier, upon so much of the amount of   tax payable by him according to such assessment as   remains  unpaid  at  the  [end  of  each  such  month  of   default;]

Provided  that  where  an  assessment  under   section 11 is  made for  more  than [one period]  and  such  assessment  does  not  show  separately  the  tax  payable for the period in respect of which interest is   payable  under  this  sub-section,  the  Commissioner   shall estimate the tax payable for such period on the   

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basis  of  such  assessment  after  giving  the  dealer  an  opportunity of being heard.

(3) Where a dealer fails to make payment of any tax   payable after assessment by the date specified in the   notice issued under sub-section (3) of section 11 for  payment thereof, he shall pay a simple interest at the  rate  of  two  per  centum  for  each  English  calendar   month of default from the first day of the month next   following the date specified in such notice up to the  month preceding the month of full payment of such tax   or  up  to  the  month  preceding  the  month  of   commencement of  proceedings  under sub-section (4)   of section 11, whichever is earlier, upon so much of   the amount of tax payable by him according to such  notice  as  remains  unpaid  at  the  [end  of  each  such  month of default.]   

29) Similarly, in Section 31 of the Act, 1994, it is provided that:

“31. Interest for non-payment or delayed payment of   tax  before  assessment. –  (1)  Where  a  registered   dealer,  or a dealer required to furnish return under   sub-section  (3)  of  section  30,  furnishes  a  return  referred to in that section in respect of any period by   the prescribed date or thereafter, but fails to make full   payment of the tax payable under sub-section (4) of   that  section  in  respect  of  such  period  by  such   prescribed date, he shall pay a simple interest at the   rate  of two  per  centum  for  each  British  calendar  month of default from the first day of such month next   following  the  prescribed  date  up  to  the  month   preceding the month of full payment of such tax or up   to the month prior to the month of assessment under   section 45 or section 46, as the case may be, in respect   of such period, whichever is earlier, upon so much of   the amount of tax payable by him according to such  return  as  remains  unpaid  at  the  end  of  each  such   month of default: Provided that where such dealer admits in writing that   the amount of tax payable in respect of such period is   an amount which is either more or less than what has   

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been originally  shown as  payable  in  the  return  and   where the Commissioner is  satisfied on the  point  of   such admission, the interest shall be payable upon so   much of the amount of tax payable according to such   admission as remains unpaid at the end of each such   month of default.

(2) Where a registered dealer, or a dealer required to  furnish return under sub-section (3) of section 30, fails   to furnish a return referred to in that section in respect   of  any  period  by  the  prescribed  date  or  thereafter   before the assessment under section 45 or section 46,   as the case may be, in respect of such dealing, and on   such assessment full  amount of tax payable for such  period is found not to have been paid by him by such  prescribed date, he shall pay a simple interest at the   rate  of  two  per  centum  for  each  British  calendar   month of  default  for the first  day of  the month next   following  the  prescribed  date  up  to  the  month   preceding the month of  full  payment of  tax for such  period  or  up  to  the  month  prior  to  the  month  of   assessment under section 45 or section 46, as the case  may be, in respect of such period, whichever is earlier,   upon so much of  the amount of  tax payable by him  according to such assessment as remains unpaid at the   end of each such month of default: Provided that where an assessment under section 45   or section 46 is made for more than one period and   such  assessment  does  not  show  separately  the  tax  payable for the period in respect of which interest is   payable  under  this  sub-section,  the  Commissioner   shall apportion the tax payable for such period on the  basis of such assessment.

(3) A dealer liable to pay interest  under sub-section  (1) or sub-section (2) of this section or sub-section (8)   of  section  40,  as  the  case  may  be,  shall,  in  the   prescribed manner, pay into a Government Treasury  or the Reserve Bank of  India the amount of  interest   payable by, or due from, him by such date as may be   prescribed.

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(4) Interest under sub-section (1) or sub-section (2) of   this section shall be payable in respect of the returns,   the prescribed dates for the functioning of which under   sub-section (2) or sub-section (3) of section 30 are the   dates subsequent to the appointed day.”

30) Interest is compensatory in character and is imposed on an assessee  

who has withheld payment of any tax as and when it  is  due and  

payable.  The interest is levied on the actual amount of tax withheld  

and  the  extent  of   delay  in  paying  the  tax  on  the  due  date.  

Essentially, it is compensatory and different from penalty which is  

penal in character [See  Pratibha Processors and Ors. v.  Union of   

India and Ors. – AIR 1997 SC 138].  In the instant case, it is not in  

dispute  that  the  amount  of  tax  due  on  the  basis  of  the  return  

furnished by the assessee has not been paid before the expiry of the  

last date of filing of such return required by Section 10A of the Act,  

1941 and Section 31 of the Act, 1994. These sections provide that  

where tax due on the basis of the return has not been paid before the  

expiry  of  the  last  date  of  filing  of  such return,  provision of  sub-

section  (2)  shall  apply  to  the  recovery  of  such  demand  for  the  

amount of tax due.  Sub-section (2) states that if the tax or any other  

amount due under  the Act  is  not  paid by the dealer  or any other  

person  by  whom it  is  payable  within  the  period  specified  in  the  

demand notice, it shall be liable to pay interest on the tax or other  

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amount which was payable at the rate specified in that sub-section.  

The learned senior counsel Sri A.K. Ganguli would contend that it is  

only  after  quantification  of  tax  liability  and  service  of  demand  

notice, as provided under the Act, and if that is not complied, then  

only  interest  becomes  payable  by  the  dealer.   In  our  view,  it  is  

difficult  to  accept  this  submission  of  the  learned  senior  counsel.  

This submission goes contrary to the statutory provision provided  

under Section 10A of the Act, 1941 and Section 31 of the Act, 1994.  

The Section provides that tax due on the basis of the returns shall be  

paid  before  the  expiry  of  the  last  date  of  filing  of  such  return.  

Therefore,  under Sub-Section (1),  the assessee would be liable to  

pay interest on the amount of such tax from the date when it was  

payable, i.e. from the expiry of the last date of filing of returns under  

the Act.   This Section specifically refers to notice of demand but  

obviously  relates  to  sub-section  (1)  where  notice  of  demand  is  

required to be issued after the assessment of tax is completed and the  

amount  of  the  tax  assessed  becomes  due  only  after  the  issue  of  

notice  of  demand  as  provided  in  sub-section  (1)  but  there  is  no  

requirement  in  the  case  of  payment  of  tax  due  on  the  basis  of  

quarterly return to be filed by the dealer.  It is solely governed by  

sub-section (3): where the tax due on the basis of quarterly return is  

not paid before the expiry of the last date of filing of such return  

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under the Act, it is not necessary to issue any notice of demand but  

on the default being committed by the dealer, he becomes liable to  

pay interest under sub-section (2) on the amount of such tax from the  

last date of filing quarterly returns prescribed under the Act.  In the  

present case, it is the admitted position that tax due on the basis of  

quarterly return was not paid as required by sub-section (3) and the  

appellant was, therefore, liable to pay interest on the amount of tax  

in respect of  which default was committed at the rate prescribed in  

sub-section  (2)  from  the  last  date  prescribed  for  filing  quarterly  

return under the Act upto the date of payment.

31) In view of the above, there is no merit in this appeal.  It is hereby  

rejected. No costs.

…………………………………J.                                                                         [ D.K. JAIN ]

…………………………………J.        [ H.L. DATTU ]

New Delhi, October 22, 2010.

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