Penal interest on deferred tax payments is not recoverable when the assessee complied with sanctioned instalment or stay arrangements.

Penal interest under the Kerala General Sales Tax Act was treated as unrecoverable where the assessee had complied with instalment orders, stay arrangements, or other deferred-payment directions sanctioned by the Government or the court, because recovery in those circumstances was considered arbitrary and inconsistent with Article 14. The same approach was applied where the demand had become unsustainable on the facts, including provisional assessments later displaced by final assessments or cases where the assessee had already paid more than the eventual liability. By contrast, where delay was only nominal and no special equitable circumstance existed, the statutory demand was left undisturbed.

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Issues: (i) Whether penal interest under section 23(3) of the Kerala General Sales Tax Act, 1963, could be recovered where the assessee had paid tax in instalments or under conditional stay arrangements sanctioned by the Government or the Court and had complied with those directions; (ii) whether such penal interest was recoverable in cases where the demand had become arbitrary or unsustainable on the facts, including provisional assessments later overtaken by final assessments; (iii) whether the Court would interfere where the delay in payment was only nominal and no special equitable circumstance existed.

Issue (i): Whether penal interest under section 23(3) of the Kerala General Sales Tax Act, 1963, could be recovered where the assessee had paid tax in instalments or under conditional stay arrangements sanctioned by the Government or the Court and had complied with those directions.

Analysis: Section 23(3) contemplates an order permitting payment in instalments. The Court treated a Government direction or a judicial arrangement permitting deferred payment as effective for the purpose of collection and held that the assessee, having acted on that indulgence and completed payments accordingly, could not fairly be treated as liable to penal interest on the footing that the permission was only partially effective. The demand was considered arbitrary and unconscionable in those circumstances, and statutory action was required to withstand the test of Article 14 of the Constitution of India.

Conclusion: Penal interest was held not recoverable in such cases, provided the assessee complied with the Government or Court order permitting payment.

Issue (ii): Whether such penal interest was recoverable in cases where the demand had become arbitrary or unsustainable on the facts, including provisional assessments later overtaken by final assessments.

Analysis: The Court applied the same equitable and constitutional approach to cases where provisional assessment or delayed disposal of appeals had resulted in penal interest being levied in circumstances that were found to be unreasonable. Where the assessee had already paid amounts exceeding the eventual tax liability or had complied with stay conditions and the demand was raised after the underlying assessment position had changed, the collection of penal interest was treated as unjustified on the facts.

Conclusion: The penal interest demands in those fact situations were held not recoverable.

Issue (iii): Whether the Court would interfere where the delay in payment was only nominal and no special equitable circumstance existed.

Analysis: In the petitions where there was only nominal delay and no Government order, conditional stay, or comparable circumstance, the Court found no basis to displace the statutory demand. The matters did not present any special feature warranting interference.

Conclusion: Relief was refused and those petitions were dismissed.

Final Conclusion: The decision granted relief against recovery of penal interest in cases where the assessees had complied with instalment or stay arrangements and where the demand was found arbitrary on the facts, but it left untouched the statutory levy in cases of ordinary delay without such special circumstances.

Ratio Decidendi: A demand for penal interest under the sales tax law cannot be enforced where the assessee has acted on an order or arrangement permitting deferred payment and has complied with it, because such recovery would be arbitrary and offend Article 14.

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