Penal interest under sales tax law must track the operative demand, and appellate changes reset the interest base.

Penal interest under section 23(3) of the Kerala General Sales Tax Act, 1963 is compensatory and can be levied only with reference to the tax legally payable under the demand actually in force. When an appellate order reduces or sets aside the assessment, the original demand ceases to operate to the extent of the relief granted, so interest must be limited accordingly under section 23(5); where a later appellate order restores the original assessment, interest becomes chargeable again on the restored balance until payment. The impugned demand was unsustainable as framed because the interest had to be recalculated period-wise by reference to the operative demand.

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Issues: Whether penal interest under section 23(3) of the Kerala General Sales Tax Act, 1963 was leviable for the periods during which the original assessment stood modified by appellate order and for the period after the appellate order restoring the original assessment.

Analysis: Penal interest under section 23(3) is compensatory only when tax remains unpaid under a valid demand. When the appellate authority reduces or sets aside the assessment, the original demand ceases to operate to the extent of the relief granted, and interest must be correspondingly limited in terms of section 23(5). During the period when the reduced demand alone was in force, no penal interest could be levied beyond that reduced liability if it had been paid as demanded. Once the later appellate order restored the original assessment, interest again became chargeable on the restored balance until payment.

Conclusion: The levy of penal interest had to be recalculated on the basis of the operative demand for each relevant period, and the impugned demand was unsustainable as framed.

Ratio Decidendi: Penal interest under section 23(3) of the Kerala General Sales Tax Act, 1963 can be levied only with reference to the tax legally payable under the demand actually in force, and any appellate reduction or restoration of assessment changes the basis and period of such interest accordingly.

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