Penal interest on stayed tax demand cannot run during suspension of recovery and must be reduced after appellate tax relief.

Where recovery of a sales tax demand was stayed pending appeal and the assessee furnished security, penal interest could not be levied for the stayed period because recovery itself stood suspended. After the appellate order reduced the tax liability, section 23(5) of the Kerala General Sales Tax Act, 1963 required proportionate reduction of penal interest, so interest could be charged only on the reduced amount from the date of the appellate order until payment. Any excess interest demand for the earlier stay period was unsustainable and refundable.

---

---

Issues: (i) Whether penal interest could be levied for the period during which recovery of the assessed tax had been stayed pending disposal of the appeal. (ii) Whether, after the appellate order reduced the tax liability, penal interest could be charged only on the reduced amount from the date of the appellate order.

Issue (i): Whether penal interest could be levied for the period during which recovery of the assessed tax had been stayed pending disposal of the appeal.

Analysis: Recovery of the original assessment demand had been stayed by the Government pending disposal of the appeal, and the assessee had furnished security in compliance with that stay. In those circumstances, the assessee was entitled to proceed on the basis that recovery stood suspended and was not required to seek a separate stay. A demand for penal interest during the period when recovery itself was stayed would be arbitrary and unjustified.

Conclusion: Penal interest for the period up to the date of the appellate order was not sustainable and was quashed in favour of the assessee.

Issue (ii): Whether, after the appellate order reduced the tax liability, penal interest could be charged only on the reduced amount from the date of the appellate order.

Analysis: Section 23(5) of the Kerala General Sales Tax Act, 1963 provides that where tax or other amount due is reduced in appeal, the penal interest levied for non-payment shall be proportionately reduced. The appellate authority had not set aside the assessment but only directed its modification, so liability on the reduced amount continued from the date of the appellate order. However, no liability for penal interest accrued for the earlier period because recovery had been stayed.

Conclusion: Penal interest was payable only on the reduced tax amount from the date of the appellate order until payment, and any excess demand was liable to be refunded.

Final Conclusion: The challenge succeeded only to the extent of the period covered by the stay, while liability for penal interest survived on the reduced assessment from the date of the appellate order onward.

Ratio Decidendi: Where recovery of a tax demand is stayed pending appeal, penal interest cannot be levied for the stayed period; after appellate reduction of tax, penal interest is chargeable only on the reduced amount in accordance with the statutory provision for proportionate reduction.

---