Compounding tax scheme cannot be withdrawn after acceptance; differential interest starts only after assessment-based default arises.

An assessee who applies for compounding and remits tax in accordance with that scheme cannot later resile after benefiting from it throughout the year and insist on ordinary assessment on returned turnover. Interest on differential tax that arises only when the assessment order modifies the basis cannot be levied for any period before default actually occurs, and is confined to the period after service of the demand notice. Reconsideration may be directed only on the earlier-year tax basis where that basis affects the compounded computation, with the assessment otherwise left intact.

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Issues: (i) whether an assessee who applied for payment of tax at compounded rate and acted upon that application by remitting tax in terms of it could later withdraw from the scheme and insist on assessment on returned turnover; (ii) whether interest could be levied on the differential tax for the period before default arose when the differential demand flowed from the assessment order itself; (iii) whether the tax basis for the earlier year required reconsideration and a revised order could be directed.

Issue (i): Whether an assessee who applied for payment of tax at compounded rate and acted upon that application by remitting tax in terms of it could later withdraw from the scheme and insist on assessment on returned turnover.

Analysis: The application for compounding remained pending, was never withdrawn, and was consistently acted upon by the assessee through monthly remittances at the compounded rate. The assessing officer did not reject the application and, in the course of assessment, accepted the scheme after correcting the basis relating to the earlier year. The statutory scheme did not prescribe a time-limit for passing an order on the compounding request, and the assessee could not, after availing the benefit of the scheme throughout the year, resile from the offer and seek ordinary assessment.

Conclusion: The assessee could not backtrack from the compounding application, and the assessment at the compounded rate was upheld in favour of Revenue.

Issue (ii): Whether interest could be levied on the differential tax for the period before default arose when the differential demand flowed from the assessment order itself.

Analysis: The increase in tax liability arose only when the assessing officer modified the basis in the assessment process. Until the assessment order and notice were served, no default attributable to the differential amount had arisen. Interest, therefore, could not be charged for the period anterior to service of the demand arising from the assessment.

Conclusion: Interest was not payable for the pre-default period, and it was confined to the period after service of the assessment-demand notice, in favour of the assessee on this limited issue.

Issue (iii): Whether the tax basis for the earlier year required reconsideration and a revised order could be directed.

Analysis: The basis adopted for the earlier year formed part of the computation for the compounded liability for the relevant year. The matter required fresh consideration on that limited aspect, after hearing the assessee, while leaving the compounding assessment otherwise intact.

Conclusion: The matter was directed to be reconsidered only on the earlier-year tax basis, with a revised order to follow after opportunity to object.

Final Conclusion: The revision succeeded substantially for Revenue on the validity of compounding assessment, but limited relief was granted to the assessee on interest and on reconsideration of the earlier-year tax basis.

Ratio Decidendi: An assessee who has applied for compounding and has acted upon it by remitting tax in accordance with that application cannot later resile from the scheme after the close of the year, and interest on any differential demand arising only upon assessment cannot be charged for the period before default actually arises.

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