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Whether Liability for Payment of Interest is Automatic and it Requires Adjudication Process or not, Clarified by Jharkhand High Court

Article Dated 29th April, 2020

 

WHETHER LIABILITY FOR PAYMENT OF INTEREST IS AUTOMATIC AND IT REQUIRES ADJUDICATION PROCESS OR NOT, CLARIFIED BY JHARKHAND HIGH COURT

By Sh. Rajesh K. Arora,
SUPERINTENDENT (Retd.), CUSTOMS, GST & C.EX

Tax payment is always a major concern for every citizen but in case of indirect tax payment, the tax is to be collected and paid to the government. But when it comes to payment of interest, it is always burdensome on the Tax Payer because it can not be collected indirectly from the consumers but the same is required to be paid from the pocket. Therefore, calculation of Interest and recovery of interest has always been a bone of contention between the Tax Payers and the Tax Collectors. The Tax Collectors always argue in favour of revenue and claim that liability of interest under section 50 of the CGST Act, is automatic and for recovery of the said interest, they can go for any rigorous action, including the use of powers vested in the department by virtue of Section 79 of the Act.

The Tax Collectors logic that once the due tax has been short paid or has been not paid by the assessee, then interest accrues and the liability for payment of interest amount under section 50 of the CGST Act, is automatic. The department’s further logic is that once the liability, on the assessee, for payment of interest arises, and if the assessee, is not paying the due interest, then department considering the same as confirmed demand, can recover from the assessee by taking a recourse to rigorous action as stipulated under Section 79 of the Act i.e by attaching bank accounts of the assessee. The department treats this liability of interest as automatic and confirmed demand. Accordingly, the department proceeds for recovery of interest without adopting/going through the laid procedure prescribed under Section 73 or Section 74 of the Act, as the case may be.

Recently, Hon’ble Jharkhand High Court in their landmark judgment in the case of M/s Mahadeo Construction Co. V/s The Union of India, Assistant Commissioner, CGST Ranchi --- [2020] 23 TUD Online 003 (Jharkhand), has laid down an important view regarding recovery of interest without following the prescribed procedure in terms of Section 73 or Section 74 of the Act, as the case may be. There were two key points before the Hon’ble Jharkhand High Court which have been taken into consideration and decided.

(i) Whether interest liability under section 50 of the CGST Act, 2017 can be determined without initiating any adjudication process either under Section 73 or Section 74 of the CGST Act in the event of an assesse raising dispute towards liability of interest?

(ii) Whether recovery proceedings under Section 79 of the CGST Act can be initiated for recovery of interest under section 50 of the said Act without initiation and completion of the adjudication proceedings under the Act?

LEGAL ASPECT

Section 50 the CGST Act deals with interest.

 “50. Interest on delayed payment of tax

(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent, as may be notified by the Government on the recommendations of the Council.

(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (1) of section 43 shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent, as may be notified by the Government on the recommendations of the Council.”

Section 73 of the CGST Act deals with issuing of Show Cause Notice in respect of cases not involving the aspect of fraud or any willful misstatement or suppression of facts for non payment of due tax. 

“73. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful misstatement or suppression of facts.

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized for any reason, other than the reason of fraud or any willful misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.

(2) The proper officer shall issue the notice under sub-section (1) at least three months prior to the time limit specified in subsection (10) for issuance of order.

(3) Where a notice has been issued for any period under subsection (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for such periods other than those covered under sub-section (1), on the person chargeable with tax.

(4) The service of such statement shall be deemed to be service of notice on such person under sub-section (1), subject to the condition that the grounds relied upon for such tax periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice.

(5) The person chargeable with tax may, before service of notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under Section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1), or, as the case may be, the statement under sub-section (3), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder.

(7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.

(8) Where any person chargeable with tax under sub-section (1) or sub-section (3) pays the said tax along with interest payable under section 50 within thirty days of issue of show cause notice, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded.

(9) The proper officer shall, after considering the representation, if any, made by person chargeable with tax, determine the amount of tax, interest and a penalty equivalent to ten per cent of tax or ten thousand rupees, whichever is higher, due from such person and issue and order.

(10) The proper officer shall issue the order under sub-section (9) within three years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilized relates to or within three years from the date of erroneous refund.

(11) Notwithstanding anything contained in sub-section (6) or sub-section (8), penalty under sub-section (9) shall be payable where any amount of self-assessed tax or any amount collected as tax has not been paid within a period of thirty days from the due date of payment of such tax.”

OBSERVATIONS OF THE HON”BLE JHARKHAND HIGH COURT

The Hon’ble High Court in para 18 of the judgment observed that a bare reading of Section 73(1) of the Act reveals that where it appears to the Proper Officer that any tax has not been paid or short paid” the Proper Officer shall serve notice on the person chargeable with tax, “which has not been so paid” or “which has been short paid” requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 of the Act and a penalty leviable under the provisions of the Act and Rules.

Thus, in terms of Section 73(1), if tax has not been paid or has been short paid, a notice is required to be served on the assesse, not only requiring him to show cause as to why tax be not recovered from it, but also specifying in the notice the interest payable under section 50 also to be recovered along with penalty.

The Hon’ble High Court in para 19 of the judgment as regards to the issue, whether in respect of cases, where the tax has been paid after some delay, would be covered under the expression “tax not being or short paid”, has relied their judgment in the case of Godavari Commodities Ltd. Vs. Union of India and ors., reported in [2019] 19 TUD Online 002 (Jharkhand), wherein, the court observed that in cases where the tax was not paid for any reason other than fraud, the tax was not paid by the petitioner Company in the Government account within the due date, and accordingly, it is a case of tax not being paid, within the period prescribed, or when due. The minimum requirement is that the principles of natural justice must be followed.

The Hon’ble Court in para 20 of the judgment observed that a bare reading of the sub-sections (5), (6) and (7) of Section 73  would reveal that a person chargeable with tax, if before service of notice pays the amount of tax along with interest payable thereon under section 50 of the Act on the basis of his own ascertainment, then the Assessing Officer, if satisfied that correct tax along with interest has been paid by the said assesse, shall not issue any notice under Section 73(1) of the Act. However, Section 73(7) of the Act provides that if an assesse, who has itself on his own ascertainment, deposited the tax along with interest, but if in the opinion of the Proper Officer, the amount paid on own ascertainment falls short of the amount actually payable, then a notice would be issued by the said Proper Officer under Section 73(1) of the Act for recovery of the actual amount payable.

The Hon’ble Court in para 21 of the judgment observed that it is not true that liability of interest under Section 50 of the CGST Act is automatic, but the said amount of interest is required to be calculated and intimated to an assesse. If an assesse disputes the liability of interest i.e. either disputes its calculation or even the leviability of interest, then the only option left for the Assessing Officer is to initiate proceedings either under Section73 or74 of the Act for adjudication of the liability of interest. The Hon’ble Court relied the judgment of Hon’ble Madras High Court dated 19.12.2019 rendered in Writ Appeals in the case of The Assistant Commissioner of CGST & Central Excise and others Vs. Daejung Moparts Pvt. Ltd. and ors reported [2019] 19 TUD Online 118 (Madras). The Hon’ble Madras High Court held that though the liability fastened on the assesse to pay interest is an automatic liability, quantification of such liability certainly needs an arithmetic exercise after considering the objections if any, raised by the assesse. The Court further held that the term “automatic” does not mean or to be construed as excluding “the arithmetic exercise”. In other words, though liability to pay interest arises under section 50 of the said Act, it does not mean that fixing the quantum of such liability can be unilateral, especially, when the assesse disputes the quantum as well as the period of liability. Therefore, in my considered view, though the liability of interest under section 50 is automatic, quantification of such liability shall have to be made by doing the arithmetic exercise, after considering the objections of the assessee.

The Hon’ble Court in para 22 of the judgment discussed about the second issue of the judgment as to whether garnishee proceedings under Section 79 of the CGST Act can be initiated for recovery of interest without adjudicating the liability of interest, when the same is admittedly disputed by the assesse. The Hon’ble court observed that although Section 79 of the CGST Act empowers the department to initiate garnishee proceedings for recovery of tax where “any amount payable by a person to the Government under any of the provisions of the Act and Rules made thereunder is not paid”. Since in the preceding paragraphs of our Judgment, we have already held that though the liability of interest is automatic, but the same is required to be adjudicated in the event an assessee disputes the computation or very leviability of interest, by initiation of adjudication proceedings under Section 73 or 74 of the CGST Act, in our opinion, till such adjudication is completed by the Proper Officer, the amount of interest cannot be termed as an amount payable under the Act or the Rules. Thus, without initiation of any adjudication proceedings, no recovery proceeding under Section 79 of the Act can be initiated for recovery of the interest amount.

DECISION OF THE HON’BLE JHARKHAND HIGH COURT

The Hon’ble High Court vide para 23 and 24 of the judgment allowed the writ by quashing the order issued by the respondent for interest and notice for recovery proceedings under Section 79 of the Act to the Banker. The Hon’ble Court directed the respondent to initiate appropriate adjudication proceeding either under Section 73 or 74 of the Act, against the petitioner and determine the liability of interest, if any, in accordance with law after giving due opportunity of hearing to the petitioner.

CONCLUSION

In the CGST Act, there are no specific provisions/Section, which stipulate issuance of Show Cause Notice solely for the demand of interest. The Hon’ble High Court ruled out that though the liability fastened on the assessee to pay interest is an automatic liability, but its quantification certainly needs an arithmetic exercise after considering the objections if any, raised by the assessee. The Court further held that the term “automatic” does not mean or to be construed as excluding “the arithmetic exercise”.  Therefore, interpretation of Section 73 and Section 74 of the Act is very necessary for demand of interest.  The recent ruling of the hon’ble High Court concluded that the amount of interest is required to be calculated and intimated to the assessee. If the assessee disputes the liability of interest i.e. either disputes its calculation or even the leviability of interest, then the only option left for the Assessing Officer is to initiate proceedings either under Section 73 or 74 of the Act for adjudication of the liability of interest.

In view of the landmark judgment of the Hon’ble Jharkhand High Court, in my opinion, following situations can arise.

  1. If the assessee/tax payer himself assess that interest is to required to be paid on tax not paid/short paid /paid not within due prescribed period and pays the interest, as the liability to pay the interest is automatic. Then there is no issue.
  2. After payment of the said interest by the assessee, if the department considers that the same i.e. the amount of interest has been short calculated by the assessee, then department may communicate the same to the assessee. In such a situation, either the assessee agrees with the amount of interest being calculated by the department. And deposits the interest amount. Then again there is no issue.
  3. In case, if the assessee disagrees and communicate/protest his disagreement i.e the assessee disputes the liability of interest regarding calculation of amount of interest or its leviability, giving the reasons for the same, then either the department would agree with the reply of assessee, and take no action.
  4. Or in case, if the department does not agree with communication of the assessee, then department can not proceed, with the said amount of interest, considering as confirmed demand i.e. the amount of interest calculated by the department cannot be termed as an amount payable under the Act or the Rules and can not initiate recovery proceedings under section 79 of the Act. The department, in such cases, have to initiate proceedings under Section 73 or Section 74, as the case may be. And only after adjudication proceedings, the department can initiate proceedings under section 79 of the Act.
Disclaimer: The views expressed in the article are in the opinion of the author. Although due care has been taken while preparing this article, but some error may creep in and accordingly before taking any action on the basis of this article, it is highly recommended to take note of the GST law first. There is no liability for any loss or damage caused to anyone due to any interpretation or omission.