Input tax credit coverage defeats interest and penalty where no surplus balance remained and evasion was not shown.

Interest and penalty were treated as unsustainable where the assessee had no surplus input tax credit available to offset the reassessed tax demand. The stated principle was that penalty requires an element of evasion or avoidance of tax, and that interest could not be justified when the tax liability was effectively covered by available credit and the factual basis for evasion was absent. On that reasoning, deletion of both interest and penalty was upheld in favour of the assessee.

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Issues: Whether the Tribunal was right in law in deleting the interest and penalty when the assessee had no surplus input tax credit available for adjustment against the reassessed tax demand.

Analysis: The substantial question was considered in the light of the availability of input tax credit and the absence of any surplus balance that could be said to remain unadjusted against the reassessed demand. The governing principle applied was that penalty under the relevant provision requires an element of evasion or avoidance of tax, and interest could not be sustained where the tax liability stood effectively covered by available credit and the factual foundation for evasion was lacking.

Conclusion: The deletion of interest and penalty was upheld and the issue was decided in favour of the assessee.

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