Penalty under KVAT requires proof of understatement, while interest on delayed tax payment remains compensatory and is sustained.

Penalty under the KVAT regime cannot be imposed mechanically: liability under Section 72(2) depends on proof of understatement of tax liability in the return, and a disclosed input tax credit claim that had been accepted earlier did not establish that element. The penalty was therefore set aside and remanded for fresh consideration. Interest under Section 36(1), however, is compensatory and applies to tax found payable; on the facts stated, the interest levy was within the statutory scope and was sustained.

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Issues: (i) Whether penalty under Section 72(2) of the Karnataka Value Added Tax Act, 2003 was leviable when the assessee had disclosed the claim for input tax credit in the returns. (ii) Whether interest under Section 36(1) of the Karnataka Value Added Tax Act, 2003 was chargeable on the tax amount found payable.

Issue (i): Whether penalty under Section 72(2) of the Karnataka Value Added Tax Act, 2003 was leviable when the assessee had disclosed the claim for input tax credit in the returns.

Analysis: Penalty under Section 72(2) depends on understatement of tax liability in the return. The claim for input tax credit on chemicals, fertilizers and pesticides was disclosed in the returns, and the returns had been accepted earlier. In such circumstances, the element of understatement was not established. The assessing authority treated penalty as mandatory without adequately dealing with the objections or giving proper reasons.

Conclusion: The levy of penalty was set aside and the matter was remanded to the Assessing Officer for fresh consideration in accordance with law.

Issue (ii): Whether interest under Section 36(1) of the Karnataka Value Added Tax Act, 2003 was chargeable on the tax amount found payable.

Analysis: Interest is compensatory in nature and is intended to make good the loss caused to the revenue by delayed payment of tax. On the facts found, the levy of interest was within the scope of Section 36(1), and the appellate authorities had correctly upheld it.

Conclusion: The levy of interest was confirmed.

Final Conclusion: The challenge succeeded only on the penalty component, while the interest demand was sustained, resulting in a partial allowance of the petitions and a remand limited to reconsideration of penalty.

Ratio Decidendi: Penalty under the KVAT regime cannot be imposed mechanically and requires proof of understatement of tax liability in the return, whereas interest for delayed tax payment is compensatory and follows the statutory liability.

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