Retrospective tax exemption defeated excess demand and penalty, with refund allowed subject to verification of collection at the lower rate.

A retrospective exemption and rate reduction displaced the earlier assessment, so the excess tax collected at the higher rate could not be retained if the statutory refund condition was met. The assessee was therefore entitled to refund of the differential tax, subject to verification that tax had been collected only at the lower rate from purchasers. Penalty proceedings also could not survive once the assessment liability no longer subsisted, because the basis for alleging concealment or tax evasion under the penalty provision had fallen away. The High Court accordingly directed refund, subject to verification, and quashed the penalty proceedings and connected demands.

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Issues: (i) Whether the differential tax collected under the earlier assessment could be refunded after the retrospective exemption / rate reduction and setting aside of the assessment order; (ii) Whether penalty proceedings and the consequential demand could survive once the assessment liability no longer subsisted.

Issue (i): Whether the differential tax collected under the earlier assessment could be refunded after the retrospective exemption / rate reduction and setting aside of the assessment order.

Analysis: The assessment order stood displaced by the subsequent notification granting exemption by reducing the rate of tax retrospectively, subject to the condition that the assessee had not recovered tax at the higher rate from purchasers. Once the Tribunal had set aside the assessment and the legal liability stood reduced to the lower rate, the demand collected on the footing of the higher rate could not be retained, provided the factual condition in the notification was satisfied.

Conclusion: The assessee was entitled to refund of the differential amount, subject to verification that tax had been collected only at 6 per cent from purchasers.

Issue (ii): Whether penalty proceedings and the consequential demand could survive once the assessment liability no longer subsisted.

Analysis: Penalty under section 69 of the Act was linked to concealment, false particulars, or tax evasion accompanied by fraud or gross negligence. In the present case, after retrospective reduction of tax liability and setting aside of the assessment, there was no surviving basis to treat the assessee as having evaded tax. Continuation of penalty proceedings in such circumstances would be unjustified.

Conclusion: The penalty proceedings and the consequential demands were quashed.

Final Conclusion: The writ petitions were allowed in substance by directing refund of the differential tax amounts, subject to the stipulated verification, and by quashing the penalty proceedings and connected demands.

Ratio Decidendi: Where a retrospective statutory exemption or rate reduction eliminates the foundation of the assessed tax liability, retention of excess tax and continuation of penalty proceedings for alleged evasion cannot be sustained, subject to satisfaction of any statutory conditions attached to the refund.

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