M/s. Reflex Industries Limited (Reflex) & M/s. Shisha Technologies Pvt. Ltd. (Sherisha), collectively referred to as “the Petitioners” have filed simultaneous Writ Petitions respectively i.e. W.P.No.23360 & W.P.No.23661 of 2019 in the High Court of Madras against the Assistant Commissioner of CGST & Central Excise, Rajakilpakkam (Respondent 1) and the Superintendent of Central Tax, Rajakilpakkam (Respondent 2), collectively referred to as “the Respondents”.

The Petitioners are registered as assessees under the provisions of the CGST Act, 2017, and have admittedly filed Returns of Income belatedly for the period 2017-2018. Respondent 2 has issued Communications dated 7th May 2019 (in W.P .No. 23360 of 2019) and 15th May 2019 (in W.P.No.23361 of 2019) computing the delay in filing of Returns and consequently the interest to be remitted on the tax amount shown in the Returns. Demand notices were issued to the Banks of the Petitioners seeking to recover the arrears of interest from the balances in their accounts. The Petitioners objected stating that they had enough Input Tax Credit (ITC) available with the Department and thus interest could be demanded, if at all, only on the cash component of the tax remitted belatedly.

Issues

In the present case, the issue was Whether Interest Liability in GST arises only on net tax liability, which was paid in cash?

Judgment

The High Court Of Madras has passed the following order in the matter of Writ Petition No. 23360 & 23361 of 2019 dated 6th January 2020 observed that there is some history to this matter as this very issue appears to have been raised earlier by a Petitioners in P.No.15978 of 2019. A learned single Judge, by order dated 13th June 2019, directed the Petitioners therein to remit the admitted tax, being a tax on the cash component of the demand belatedly paid and the Department to dispose the representation of the Petitioners in that case to the effect that there would be no liability to interest in regard to the Input Tax Credit (ITC) available with the Department.

As against the aforesaid order, Writ Appeals were filed before the Division Bench and by order dated 23rd July 2019, the two Hon’ble Judges expressed divergent views. One Judge dismissed the Writ Appeals, whereas the second Judge was of the opinion that the legal issue on the liveability of interest called for a deeper consideration than had been extended by the learned single Judge at the stage of admission and such summary dismissal required revisiting. The matter was thus referred to a Third Judge, who by his order delivered on 19th December 2019, held that Writ Appeals of the Revenue were not warranted since the learned single Judge had not in the original instance determined the legal issue in a manner detrimental to the Revenue, but only remitted the matter back to the Assessing Officer to determine the quantum of liability.

The question crystallized by the Third Judge for consideration is as to whether interest on belated payment of tax as contemplated under Section 50 of the CGST Act is automatic or whether the same would have to be determined after considering the explanation offered by the assessee. The Hon’ble Judge holds that the liability to pay interest under Section 50 is automatic. However, since the Petitioner, in that case, had raised disputes with regard to the period for which the tax had allegedly not been paid, as well as the quantum of tax remaining unpaid in excess of Input Tax Credit (ITC), all being questions of fact, he was of the opinion that such matters would have to be resolved after hearing the assessee. He categorically states ‘therefore in my considered view though the liability fastened on the assessee to pay interest is an automatic liability, quantification of such liability certainly needs an arithmetical exercise after considering the objections if any, raised by the assessee.‘ Perusing Section 50, the High Court observed that Section 50 of the CGST Act provides for interest on belated payment of tax and as held by the third Judge, such levy is ‘automatic’ and is intended to compensate the revenue for the remittance of tax belatedly and beyond the time frames permitted under law.

Though in the context of the Income Tax Act, 1961, the question of whether remittance of interest under Sections 234A, 234B and 234C of the Income Tax Act, 1961 for belated filing of the return, belated remittances of advance tax, and deferment of advance tax are mandatory came to be considered by the Hon’ble Supreme Court in the case of Commissioner Of Income Tax, Mumbai vs Anjum M.H.Ghaswala & Ors (252 ITR 1), and held to be compensatory and hence mandatory. The principle of the said judgment applies on all fours to the instant case.

Section 50 is specifically intended to apply to a state of deprival & cannot apply in a situation where the State is possessed of sufficient funds to the credit of the assessee. The proper application of Section 50 is one where interest is levied on belated cash payment but not on Input Tax Credit (ITC) available with the Department to the credit of the assessee since the latter being available with the Department is neither belated nor delayed.

The High Court of Madras further commented that the proviso to Section 50(1), according to which interest shall be levied only on that part of the tax which is paid in cash, has been inserted with effect from 1st August 2019, but clearly seeks to correct an anomaly in the provision as it existed prior to such insertion and thus should be read as clarificatory and operative retrospectively.

High Court rejected reliance on the decision of the High Court of Telangana in the case of Megha Engineering and Infrastructures Ltd. v. The Commissioner of Central Tax and others (2019-TIOL 893), noting that the amendment brought to Section 50(1), was only at the stage of a press release by the Ministry of Finance at the time when the Division Bench passed its order and the Division Bench thus stated that “unfortunately, the recommendations of the GST Council are still on paper. Therefore, we cannot interpret Section 50 in the light of the proposed amendment”. Today, however, the amendment stands incorporated into the Statute and comes to the aid of the assessee. Consequentially, the Writ Petitions were allowed, and the Impugned Notices were set aside.