Appropriation of payments under a settlement scheme cannot be reopened when the assessee itself earmarked tax and interest separately.

Under the Kar Vivad Samadhan Scheme, 1998, disputed tax is determined by the tax remaining unpaid on the declaration date, and the settlement amount follows that unpaid position rather than a hypothetical recomputation. Where the assessee itself paid by separate challans and specifically earmarked one payment for tax and another for interest under sections 234B and 234C, the ordinary rule of appropriation applied and the department was entitled to act on that specification. The assessee could not later seek re-appropriation of the interest payment towards tax to reduce the scheme liability, and the adjustment already made was upheld.

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Issues: Whether, for purposes of settlement under the Kar Vivad Samadhan Scheme, 1998, the amount deposited by the assessee through separate challans specifying tax and interest had to be re-appropriated first towards tax so as to reduce the disputed tax payable under the scheme.

Analysis: The scheme defined "disputed tax" by reference to the total tax determined and payable that remained unpaid on the date of declaration, and the settlement amount for a company was linked to the disputed income derived from such disputed tax. The Court noted the CBDT clarification that, where part payment is received without specification, it is first to be adjusted towards tax. However, on the facts, the assessee had itself bifurcated the payment through two challans, one towards income tax and the other towards interest under sections 234B and 234C of the Income-tax Act, 1961. Applying the ordinary rule of appropriation of payments and the settled principle that a debtor cannot later insist upon a different adjustment contrary to its own instruction, the Court held that the assessee could not reopen the already made adjustment in a proceeding under the special scheme. The scheme was also treated as operating on the basis of the unpaid position existing on the date of declaration, not on a hypothetical recomputation.

Conclusion: The assessee was not entitled to have the separately paid interest amount re-appropriated towards tax for the purpose of reducing the liability under the scheme; the adjustment made by the department was upheld.

Ratio Decidendi: Under a special settlement scheme that determines liability on the basis of tax remaining unpaid on the declaration date, a payment specifically earmarked by the assessee for tax or interest cannot later be re-appropriated in a contrary manner to alter the settled demand.

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