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CASE NO.: Appeal (civil)  5648 of 2006

PETITIONER: State of Punjab and others

RESPONDENT: M/s Atul Fasteners Limited

DATE OF JUDGMENT: 30/04/2007

BENCH: S.H. KAPADIA & B. SUDERSHAN REDDY

JUDGMENT: J U D G M E N T

KAPADIA, J.

       On 20.12.2001 Deferment Certificate was granted by the  Sales Tax Department to the respondent-assessee for the  period  April 30, 1997 to 29th April 2004.  Under that  Certificate the quantum of benefit of tax deferment was  Rs.62,47,500/-.  The said certificate stated that the assessee  was entitled to the benefit of tax deferment subject to the  maximum of Rs.62,47,500/-.  The assessee had commenced  its commercial production on April 30, 1997.  The assessee  had applied to the Industries Department for grant of  Eligibility Certificate. That Certificate was however granted  only on 13.9.2001 for 84 months ( 7 years) commencing from  April 30, 1997.  The Deferment Certificate was given by the  Sales Tax Department based on the Eligibility Certificate only  on 21.12.2001.  After the grant of Eligibility Certificate on  21.12.2001 the assessee availed the deferment of tax for the  period from 1.10.2001 to 29.4.2004 amounting to  Rs.33,48,600, as against its total entitlement of  Rs.62,47,500/-. The case of the assessee is that during the  period 30.4.1997 to 30.9.2001 it had deposited/paid an  amount of Rs.42,62,807/-.  Consequently, assessee seeks  refund of the tax amount paid by him during the period  30.4.1997 to 29.9.2001.  This claim has been granted by the  impugned judgment. Hence this civil appeal by the  Department.

       The short question which arises for determination in this  case is whether the Department was liable to pay interest @  18% p.a. on Rs. 42,62,807/- from 21.12.2001 till  refund/adjustment.           At the outset it may be noted that the entitlement of the  assessee to the grant of benefit of tax deferment is not in  issue. The quantum of the benefit is not in dispute. Similarly,  the period commencing from 30.4.1997 to 29.4.2004 is also  not in dispute. Under the Deferment Scheme read with Punjab  General Sales Tax (Deferment and Exemption) Rules, 1991, on  expiry of 7 years (84 months) i.e. on 29.4.2004, the assessee  who was allowed to retain the tax collected by it on behalf of  the Department had to repay it in 3 instalments. In the  present case the first instalment of repayment by the assessee  became due on 29.4.2004, the second instalment became due  on 28.4.2005 and the third instalment became due on  28.4.2006.  The assessee had filed a writ petition in 2004 for  refund.  

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In our view the High Court had erred in granting interest  @ 18% p.a. on Rs. 42,62,807/- with effect from 21.12.2001 till  payment.        We have examined the Deferment Scheme as well as  the said 1991 Rules framed by the Government under the  Sales Tax law.  There is no provision for grant of interest.   Before us on instructions learned advocate appearing for the  State fairly stated that the State is in appeal against the grant  of interest @ 18%.   The State is not denying the grant of  refund by adjustment.  Therefore, the only question which we  are required to consider in this civil appeal is whether the  assessee was entitled  to interest @ 18% per annum from  20/21 December 2001 upto the date of refund/adjustment.   

Interest is admissible in a tax enactment on two grounds  namely ’Agreement’ or ’Statutory Provision’. Interest cannot be  granted on the basis of equity under the tax enactment,  particularly under statutory schemes for grant of  exemption/deferment.  It is well settled that exemption  schemes have to be given strict interpretation.  Applying the  above test the High Court has erred in granting interest @ 18%  per annum for the aforestated period.  Assessee has relied  upon the provision of Section 12 of Punjab General Sales Tax  Act, 1948  for refund.  That Section states that the assessing  authority shall in the prescribed manner refund to a registered  dealer applying in this behalf any amount of tax, interest or  penalty paid by such dealer if the amount of tax paid was in  excess of the amount  due under the Act.  Section 12 is  preceded by Section 11 which deals with assessment of tax.   In the present case we are not concerned with regular  assessment of tax.  The assessment proceedings under the Act  proceeds on the basis that if the tax paid by the dealer on his  returns (declared turn over) is more than the tax assessed by  the Department then the assessee would be entitled to refund  of the excess amount with interest.  In the present case we are  concerned with the Deferment Scheme and the Deferment  Rules, 1991 framed under Punjab General Sales Tax Act,  1948.  Neither the Scheme nor the Rules provides for interest.   In the circumstances the High Court has erred in granting  interest @ 18% for the aforestated period.   We are not inclined  to grant interest on the basis of the principle enunciated in the  judgment of the  Delhi High Court in the case of Redihot  Electricals v. Union of India and others [1989 (75) STC  257] on which the assessee has placed reliance.  In the  present case there is no collection of tax.  In the present case  the assessee wanted to avoid payment of penalty during the  period when its application for Eligibility Certificate was  pending before the Industries Department.  In fact under the  Deferment Rules of 1991 an applicant is required to calculate  his entitlement on the basis of notional tax liability for the year  in question. (See clause ’j’ of Form ST (D & E) -1). Therefore,   in the present case the assessee has paid the tax under the  Sales Tax Act in order to avoid penalty. The question of paying  interest will also not arise because sales tax is an indirect tax.   It is collected by the assessee from its customers.  The  incidence of tax falls not on the assessee but on its customers.   The assessee collects the sales tax from its customers as a  part of sale price. It forms part of his turn over for the  stipulated period.  Under the Scheme the liability to pay tax by  the assessee accrues each year but the payment of tax is  deferred. On expiry of seven years the assessee has to pay  back the tax collected by it during 7 years. It is a sort of a loan  given by the State to the assessee so that the assessee can use  the tax amount  to meet its working capital requirement. As  stated the liability of the respondent-assessee accrued each  year,  therefore, there is no question of the Department paying

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interest @ 18% on the tax collected by the assessee during the  aforestated period.  The tax was collected by the assessee from  its customers as an agent for the Government.  The assessee  is allowed to retain that amount which has accrued to the  account of the State Government.  Therefore, the question of  payment of interest under the Deferment Scheme does not  arise.   This reasoning appears to be the basis for the Scheme  for not providing for the payment of interest.

       Before concluding we may state that interest @ 18% on  Rs. 42 lacs (approx.) for the period 21.12.2001 to 20.12.2007  would come to Rs. 43 lacs (approx.). In other words, the  respondent which is now under the liability to repay wants to  repay out of Interest.

       For the aforestated reasons we allow this appeal in part  by setting aside the directions of the High Court to the State to  refund the amount of the tax collected from 30.4.1997 to  20/21.12.2001 with interest @ 18% from 21.12.2001 upto the  date of refund/adjustment. We make it clear that the assessee  would be entitled to refund of the tax collected during the  aforestated period from 30.4.1997 to 20/21.12.2001.   However, that would be without interest.  Accordingly, the  appeal is partly allowed with no order as to costs.