Penal interest cannot run when the tax demand is not legally subsisting due to an operative appellate order.

Penal interest under section 23(3) of the Kerala General Sales Tax Act cannot accrue while the original tax demand is not legally subsisting because an appellate order has set it aside. The liability to interest is tied to default in payment of tax lawfully due on a live demand, and the statutory scheme contemplates cancellation or reduction of interest where the underlying tax liability is cancelled or reduced in appeal or revision. Accordingly, no penal interest was leviable for the period during which the appellate order remained operative, even though the demand was later restored in revision.

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Issues: Whether penal interest under section 23(3) of the Kerala General Sales Tax Act, 1963 was leviable for the period during which the original tax demand stood set aside by the Appellate Tribunal, but before it was restored in revision.

Analysis: Liability for penal interest under section 23(3) arises on default in payment of tax lawfully due within the prescribed time. Where an appellate order sets aside the assessment or demand, the demand ceases to be payable for the period during which that order operates. The statutory scheme in sub-sections (3), (4) and (5) also indicates that interest is linked to a subsisting demand and that the levy may be cancelled or reduced where the tax liability is cancelled or reduced in appeal or revision. In the interregnum between the appellate order setting aside the demand and the later revisional order restoring it, the assessee cannot be treated as being in default on a live demand.

Conclusion: Penal interest was not leviable for the period from 9 September 1987 to 9 March 1989 when the appellate order setting aside the levy held the field; the petitioner succeeded to that extent.

Ratio Decidendi: Penal interest under section 23(3) cannot accrue during the period in which the demand is not legally subsisting by reason of an operative appellate order setting it aside, even if the demand is later restored in further proceedings.

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