Penalty for lawful tax collection cannot stand merely because collected amounts were not refunded to customers.

Penalty under section 22(2) of the Tamil Nadu General Sales Tax Act, 1959 arises only where tax is collected in contravention of section 22(1). The Madras HC noted that the Tribunal had already found the assessee's collection of tax and surcharge on rebate and cash discount to be lawful. On that basis, the mere failure to refund or pass on the collected amount could not independently attract penalty under section 22(2). The direction to levy penalty was therefore unsustainable and was set aside in favour of the assessee.

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Issues: Whether penalty under section 22(2) of the Tamil Nadu General Sales Tax Act, 1959 could be sustained merely because the assessee did not refund the sales tax and surcharge collected on rebate and cash discount, when the collection itself had been held to be lawful.

Analysis: Section 22(2) is attracted only where a person or registered dealer collects an amount by way of tax in contravention of section 22(1). The Tribunal had already found that the assessee's collection of tax and surcharge on rebate and cash discount was not in breach of the Act. Once the collection itself was not unlawful, failure to pass on or refund the collected amount could not, by itself, create liability to penalty under section 22(2). The provision does not operate merely because the assessee may have retained the amount or not refunded it to customers.

Conclusion: Penalty under section 22(2) could not be directed on the footing that the assessee had not refunded the amount collected on rebate and cash discount; the direction to levy penalty was unsustainable and was set aside in favour of the assessee.

Final Conclusion: The revision succeeded, and the assessee obtained relief from the penalty direction.

Ratio Decidendi: Penalty under section 22(2) of the Tamil Nadu General Sales Tax Act, 1959 is exigible only when tax is collected in contravention of section 22(1), and not merely because the collected amount was not refunded to customers.

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