Penal interest cannot accrue before assessment when turnover tax liability was disputed and payment became due only after demand notices.

Penal interest could not be levied for any period before assessment where liability to turnover tax was disputed in the returns and had not been admitted by the assessees. Because tax became payable only after completion of assessment, rejection of the returns, and issuance of demand notices, no enforceable default arose earlier. The demand for arrears of penal interest relating to the pre-assessment period was therefore unsustainable and was quashed.

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Issues: Whether penal interest could be demanded for the period prior to the assessment and demand notices when the assessees had not admitted liability to turnover tax in the returns and the assessments were completed later.

Analysis: The liability to turnover tax was disputed in the returns and was under consideration in pending proceedings. In such a situation, no enforceable default for penal interest could arise before the assessing authority completed the assessments, rejected the returns, and issued demand notices. Penal interest is attracted only after tax becomes payable pursuant to a completed assessment and default occurs in payment of the assessed amount.

Conclusion: The demand notices for arrears of penal interest for the period prior to the assessment-based demand notices were unsustainable and were quashed in favour of the petitioners.

Final Conclusion: The challenge succeeded, and the impugned penal interest demands were set aside.

Ratio Decidendi: Penal interest cannot be levied for a period anterior to assessment when the liability to tax itself was not admitted and the tax became payable only upon completion of assessment and issuance of demand.

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