VAT amnesty scheme payments must be applied to principal tax liability, not re-appropriated to interest, preserving interest and penalty waiver.

Under a VAT amnesty scheme, tax already paid with the returns could not be re-appropriated towards interest so as to create an artificial shortfall and defeat the promised waiver of interest and penalty. Where the outstanding demand declared under the scheme, the authority's intimation, and the assessment order all matched, prior tax payments had to be treated as payment towards principal tax liability. Interest under the VAT provisions could not be levied on purchase tax that was not shown as due and payable in the return actually filed; the expression "tax due and payable" was confined to that return, not to a return that ought to have been filed.

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Issues: Whether, under the VAT amnesty scheme, tax already paid along with returns could be adjusted against the principal tax liability instead of being first appropriated towards interest, and whether interest under the VAT provisions could be levied on amounts not actually due and payable in the returns.

Analysis: The petitioners had declared the outstanding tax under the amnesty scheme, the authorities had intimated the same amount, and the amount was paid within the stipulated time. On a comparison of the amnesty application, the intimation letter and the assessment order, the outstanding demand for which the scheme was invoked was identical. In that situation, the authorities could not partially reject the benefit of the scheme by applying the tax already paid along with returns towards interest, thereby creating an artificial shortfall. The scheme was meant to provide relief by waiver of interest and penalty on full payment of the outstanding tax declared under the scheme, and its object would be frustrated if prior tax payments were not treated as payment towards principal dues. The Court further held that interest under the VAT provisions could not be levied on purchase tax that was not shown as due and payable in the return actually filed. The expression 'tax due and payable' had to be understood with reference to the return actually filed, and not a return that ought to have been filed.

Conclusion: The adjustment of tax paid with returns against interest was impermissible, and the petitioners were entitled to have such tax treated as payment towards principal tax liability with the benefit of waiver of interest and penalty under the amnesty scheme.

Final Conclusion: The demand notice was invalid and the assessment was required to be corrected by treating the prior tax payment as payment towards principal liability, not interest.

Ratio Decidendi: Where an assessee pays the full outstanding tax disclosed and accepted under an amnesty scheme, tax already paid cannot be re-appropriated towards interest so as to defeat the scheme's waiver of interest and penalty; interest provisions apply only to tax actually due and payable on the return filed.

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