Beneficial tax settlement scheme requires deposits to be adjusted against tax first, not interest, preserving scheme relief.

For the Karasamadhana Scheme, 2017, deposits made by dealers during pending appeals or writ petitions had to be credited against tax arrears first, not appropriated first towards interest under Section 42(6) of the Karnataka Value Added Tax Act, 2003. The Scheme operated as a special, beneficial settlement code aimed at closing pending tax disputes, so the ordinary statutory adjustment sequence could not be applied in a way that defeated its object. Rejection of Scheme applications on an interest-first basis was therefore unsustainable, and the arrears had to be recomputed by giving credit to the deposits against tax, then interest and penalty, before extending Scheme benefit.

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Issues: Whether, for the purpose of the Karasamadhana Scheme, 2017, amounts deposited by dealers during pendency of appeals or writ petitions were required to be adjusted first against tax arrears or could be appropriated first towards interest under Section 42(6) of the Karnataka Value Added Tax Act, 2003; and whether rejection of the applications under the Scheme on the basis of such interest-first adjustment was lawful.

Analysis: The Scheme was a special, beneficial settlement measure intended to secure quick recovery of tax dues and to bring pending litigation to an end before the GST regime. The Scheme itself required the arrears to be worked out with reference to the assessment order under challenge and did not authorise a fresh adjudication or a pro-revenue appropriation of deposits in a manner that would defeat its object. Amounts paid during pendency of appeals remained in the nature of deposits until the dispute attained finality and therefore could not be appropriated under the normal rule in Section 42(6) of the Karnataka Value Added Tax Act, 2003 so as to first satisfy interest and then tax. The statutory sequence under Section 42(6) governed ordinary assessment and recovery, but not the special computation required under the Scheme. In a beneficial tax scheme, where two views are possible, the interpretation favouring the dealer had to be adopted.

Conclusion: The interest-first adjustment made by the Department was unsustainable. The applications under the Scheme could not be rejected on that basis, and the authorities were required to recompute the arrears by giving credit to the deposits against tax first, thereafter towards interest and penalty, and then grant the Scheme benefit in accordance with the Court's interpretation.

Ratio Decidendi: A special settlement scheme for tax arrears must be construed as a self-contained beneficial code, and amounts deposited during pending appeals cannot be appropriated under the normal statutory adjustment rule in a manner that defeats the scheme's object; where doubt exists, the construction favourable to the assessee governs.

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