2020 (2) TMI 794 - HC - GST

Court clarifies CGST Act: Interest only on cash payments, not ITC

The court ruled in favor of the petitioners in a case concerning the calculation of interest on belated filing of Returns under the CGST Act. The judge ... Interest on delayed payment of tax - Leviability of interest under Section 50 - Automaticity of interest - Input Tax Credit (ITC) utilization versus cash payment - Retrospective clarificatory amendment to Section 50(1)Interest on delayed payment of tax - Input Tax Credit (ITC) utilization versus cash payment - Leviability of interest under Section 50 - Whether interest under Section 50 is payable on the portion of tax discharged by adjustment of Input Tax Credit which was available with the department throughout. - HELD THAT: - The Court held that Section 50 is intended to compensate the revenue for deprivation of funds where tax remains unpaid beyond the prescribed time and that the concept of 'delayed' or 'belated' payment presupposes deprival of funds to the State. Where ITC is available on the electronic ledger to the credit of the taxable person and is utilized to discharge tax, there is no deprivation of State funds during the intervening period; availment and utilization of ITC are distinct events and credit remains effective until and unless it is reversed through the statutory mechanisms. Applying the compensatory principle articulated in precedent dealing with analogous interest provisions, the Court concluded that interest under Section 50 is properly leviable on belated cash payments but does not attach to the component of tax discharged out of ITC that was held on the department's records throughout. [Paras 11, 12, 13]Interest under Section 50 is not leviable on that portion of the tax discharged by utilization of ITC which was available with the department throughout; interest is properly leviable on belated cash payments.Retrospective clarificatory amendment to Section 50(1) - Leviability of interest under Section 50 - Whether the proviso inserted into Section 50(1), providing that interest shall be levied only on the portion of tax paid by debiting the electronic cash ledger, is to be read as clarificatory and retrospective. - HELD THAT: - The Court extracted the newly inserted proviso to Section 50(1), which confines interest to that portion of tax paid by debiting the electronic cash ledger, and observed that the proviso corrects an anomaly in the pre-amendment position. Given that the amendment addresses the legal understanding of when interest should attach and cures the earlier inconsistency, the Court concluded that the proviso is clarificatory in nature and should be read as operative retrospectively to vindicate the legal position that interest is chargeable only on cash component debited to the electronic cash ledger. [Paras 14, 15, 16]The proviso to Section 50(1) is clarificatory and should be read retrospectively; it supports the proposition that interest is leviable only on the portion of tax paid from the electronic cash ledger.Final Conclusion: Writ petitions allowed: notices demanding interest from bank balances set aside on the legal conclusion that interest under Section 50 is not payable on tax discharged by utilization of ITC that was available with the department, and the subsequently inserted proviso to Section 50(1) is clarificatory and retrospective, confining interest to the cash component debited to the electronic cash ledger; no costs. Issues:1. Calculation of interest on belated filing of Returns under the CGST Act.2. Dispute regarding the liability to pay interest on the Input Tax Credit (ITC) component.3. Interpretation of Section 50 of the CGST Act regarding the automatic levy of interest.Analysis:1. The petitioners, registered under the CGST Act, filed Returns of income belatedly for the period 2017-18. The respondents issued communications computing the delay in filing Returns and the interest to be remitted on the tax. Demand notices were sent to the Banks to recover arrears of interest from the petitioners' accounts.2. The petitioners argued that they had sufficient ITC available with the Department, and interest should only be demanded on the cash component of the tax remitted belatedly. They contended that interest should not apply to the ITC amount adjusted towards the tax demands. The main issue raised was whether interest was payable on the ITC component.3. The legal issue revolved around whether interest was automatically payable on belated tax payments, considering the availability of ITC. Previous judgments and appeals highlighted the need for a deeper consideration of the interest levy. The Third Judge clarified that while interest was automatic, the quantification required an arithmetical exercise after hearing the assessee's objections.4. The judgment focused on the interpretation of Section 50 of the CGST Act, which mandates interest on delayed tax payments. The Judge emphasized that the levy of interest was compensatory to the revenue for belated remittance of tax. The comparison to Income Tax Act provisions reinforced the mandatory nature of interest payments for delayed filings.5. The Judge analyzed whether the term 'belated' or 'delayed' applied to situations where credit was due to an assessee, leading to the conclusion that interest should not be levied on ITC available with the Department. The Judge reasoned that Section 50 aimed to address deprival of funds, which did not apply when the State already possessed sufficient funds through ITC.6. The judgment referred to a proviso inserted into Section 50(1) that clarified interest would be levied only on the portion of tax paid in cash. This amendment, effective from 01.08.2019, aimed to rectify existing anomalies in the provision. The Judge also considered a Telangana High Court decision interpreting Section 50, emphasizing the importance of the recent statutory amendments.7. Ultimately, the Writ Petitions were allowed, setting aside the impugned notices demanding interest on ITC amounts. The judgment highlighted the correct application of Section 50, ensuring interest was levied only on belated cash payments, not on ITC available with the Department.