Refund of pre-deposit with interest follows once appellate relief vacates the demand and no penalty survives.

Where an appeal is allowed with consequential relief and the impugned demand is vacated in full, the Department cannot retain the pre-deposit or continue to hold the bank guarantee furnished under the stay order. A claim that the amount should be appropriated towards an alleged penalty fails where no part of the original order survives after appellate relief. If refund is not made within a reasonable time after the appellate order, interest is justified on the delayed return of the deposit. The deposit was ordered to be refunded with interest after three months from the appellate order, and the bank guarantee was directed to be returned forthwith.

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Issues: Whether the amount deposited and the bank guarantee furnished pursuant to the stay order were liable to be returned with interest after the appeal had been allowed with consequential relief, and whether the Department could retain or appropriate the pre-deposit towards an alleged penalty.

Analysis: The appeal had already been allowed with consequential relief, and the operative effect of that order was to vacate the impugned demand in its entirety. Once the order under challenge stood set aside, the amount deposited under the pre-deposit provision and the bank guarantee furnished under the stay order could not continue to be retained by the Department. The Department's attempt to treat the penalty as still outstanding was based on a misconception, because the final appellate order had not left any surviving part of the impugned order. As the refund ought to have followed within a reasonable time after the appellate order, delay in returning the deposit justified grant of interest.

Conclusion: The assessee was entitled to return of the deposit of Rs. 65,000 with interest at 12% per annum after expiry of three months from the appellate order, and the original bank guarantee was also directed to be returned forthwith.

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