Interest on non-compliance with Rule 86B

[vaibhav agrawal]

A taxpayer did not comply with Rule 86B during FY 2022-23 and discharged 100% of output tax liability through eligible ITC instead of paying the mandatory 1% in cash.The Department is now demanding interest under Section 50 on the 1% shortfall from the original due dates.

However, the taxpayer had substantial balances in the Electronic Cash Ledger during the relevant period, including amounts deposited before/around the relevant due dates, which continued to remain available in the ledger.

Questions:

1. Does non-compliance with Rule 86B automatically attract interest under Section 50?
2. Can the 1% be considered "tax remaining unpaid" when the output tax liability was otherwise discharged through eligible ITC?
3. Does the availability of sufficient funds in the Electronic Cash Ledger affect the applicability/calculation of interest?

AI Summary

Rule 86B cash-payment restriction raises whether full eligible ITC utilisation creates unpaid tax and Section 50 interest liability.
Rule 86B non-compliance raises whether use of eligible ITC for the entire output tax liability creates unpaid tax for Section 50 interest. One view treats the breach as a mode-of-utilisation restriction rather than delayed tax payment, unless a statutory basis deems the cash portion unpaid. Sufficient Electronic Cash Ledger funds credited before the due date and continuously available may support a defence against compensatory interest, subject to ledger chronology and jurisdictional views. A contrary view distinguishes cash-ledger deposits from actual tax payment and treats the prescribed cash portion as payable.