Holding

The demand for interest was not enforceable because it was made after the statutory three‑year period, although interest accrues automatically and no separate notice is required.

Summary

The Commissioner of Trade Tax of Uttar Pradesh assessed M/s Kanhai Ram Thekedaar for the 1977-78 tax year in 1986, which the assessee fully paid. In 1990 the assessing authority issued a separate order imposing interest at 24% per annum on the unpaid tax, without a prior notice. The assessee appealed, and after a series of appeals the High Court quashed the interest order on the ground that no notice was served. The Supreme Court held that interest liability arises automatically under Section 8 of the U.P. Trade Tax Act and does not require a fresh notice, but the demand for interest must be made within a reasonable period – the three‑year limitation for rectifying an assessment. Since the interest demand was made after nearly four years, it was barred by limitation, and the assessee was not liable to pay the interest. The Department may recover the interest from the assessing officer, and the appeal was dismissed.

Issues considered

Whether a demand for interest on tax imposed after the assessment order is barred by the three‑year limitation period for rectification of the assessment.
Whether a separate notice of demand is required before an order imposing interest under Section 8 of the U.P. Trade Tax Act.

Subjects

interest on taxlimitation periodnotice of demandU.P. Trade Tax Actassessment orderautomatic interestrectification

Judgment

A COMMISSIONER OF TRADE TAX, LUCKNOW
v.
M/S. KANHAI RAM THEKEDAR

APRIL 29, 2005

B [S.N. VARIA VA AND DR. AR. LAKSHMANAN, JJ.]

U.P. Sales Tax Act, 1948 (now U.P. Trade Tax Act, 1948)-Sections
8(1), 8(1-B) and 8(2) :

c Demandfor interest on tax-Not made in assessment order imposing tax
liability-Made by a separate order after four years, though three years is the
limitation period for rectification of assessment order-Validity of-Held:
Assessee not liable to pay interest in view of inordinate delay in raising the
demand-Department however entitled to recover the interest from the Assessing
D Officer concerned for not taking steps for four years.

Demand for interest on tax-ls automatic and arises by operation of
law-Notice not necessary before raising demand for interest.

On 6-6-1986, the Assessing Authority passed order imposing tax
E liability on respondent-dealer in respect of assessment year 1977-78.
Respondent-assessee deposited the entire amount of tax. However
subsequently on 30-7-1990, the assessing authority passed another order .·
holding that on the admitted amount of tax the respondent was liable to
pay interest at the rate of24% p.a. from 1-5-1978. Respondent filed appeal
contending that the proceedings imposing interest were barred by time.
F The appeal was dismissed. Second appeal was filed before the Tribunal
which remanded the matter to the assessing authority for fresh decision.
Respondent filed revision before High Court which held that even if
respondent-dealer was liable to pay interest on delayed payment of amount
of tax, a notice in writing before passing the impugned order was
G necessary, but as the impugned order dated 30-7-1990 nowhere stated that
any notice was sent to the dealer, such an order could not be sustained.
Consequently, it allowed the revision and quashed the order of Tribunal.

In appeal to this Court, the questions of law arising for consideration
are whether subsequent proceeding to the assessment was barred by
lI 984
COMMR. OF TRADE TAX v. KANHAI RAM THEKEDAR 985

limitation and whether the order of the High Court to the extent that a A
notice of demand was necessary before passing the order of interest is
legally sustainable.

Dismissing the appeal, the Court

HELD : 1.1. The liabili!Y for payment of interest arises in view of B
the provisions contained in Section 8 (1), 8(1-8) and sub-section (2) of
Section 8 of the U.P. Sales Tax Act, 1948 (now the U.P. Trade Tax Act,
1948). (987-G-HI

1.2. The High Court was not justified for deleting the interest levied
by the authorities on the ground that no notice was served. However, the C·
demand of interest was not justified because of the inordinate delay on
the part of the officers concerned for raising the demand of interest from
the assessee and in the peculiar facts and circumstances of the case. There
was no demand of interest in the assessment order. As the assessment order
did not include a claim for interest, the demand for interest had to be mad.e D
within a reasonable period thereafter. For rectification of the assessment
order, a limitation period of three years is laid down. Since the demand
of interest was made after almost four years, the demand is not within a
reasonable period and the assessee is not liable to pay the interest as
demanded. The Department is not entitled to recover the interest from
the assessee-respondent but is at liberty to recover the amount of interest E
demanded from the Assessing Officer concerned who have not taken steps
for four years. [9~2-E-H; 993-A, B, C, DJ

... Firm Parshuram Rameshwar Lal v. State of UP., (1974] 33 STC 540
All, approved.

Commissioner of Sales Tax v. Qureshi Crucible Center, (1993) suppl 3
SCC 495; The Sales Tax Officer, Sector /, Kanpur and Anr. v. Mis Dwarika
Prasad Sheo Karan Dass, [19771 1 SCC 22; Haji Lal Mohd. Biri Works v.
State of UP., [19741 3 SCC 137 and Prah/ad Rai and Ors. v. Sales Tax
Officer, Meerut and Ors., (1991) Supp 2 SCC 612, relied on.
G
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2679 of2000.

From the Judgment and Order dated 16.9.99 of the Allahabad High
Court in T.T.R. No. 3 of 1999.

H
986 SUPREME COURT REPORTS [2005] 3 S.C.R,

A R.G. Padia, S.W.A. Qadri and J.K. Bhatia with him for the Appellant.

Ranbir Singh Yadav for the Respondent.

The Judgment of the Court was delivered by

B OR. AR. LAKSHMANAN, J. This appeal is filed by the Commissioner
of Trade Tax, U.P. challenging the final order dated 16.9.1999 passed by the
High Court of Judicature at Allahabad in the Trade Tax Revision No. 3 of
1999 whereby the High Court allowed the revision of the respondent-assessee.

The brief facts pertaining to the present appeal are as under :
c By the impugned ord~r, the High Court allowed the revision filed by
the respondent and quashed the order of dem:md of interest on the ground
that no notice in writing was issued. It was observed in the judgment that
even if the dealer was liable to pay interest on the late payment of amount
of tax a notice is necessary for demand of interest. In the instant case, the
D assessing authority passed the order on 30.7.1990 imposing interest against
the respondent. The respondent filed appeal before the Commissioner (Judicial)
Sales Tax, now Trade Tax, Allahabad Region, Allahabad. In the appeal, the
respondent mentioned that ex parte proceedings imposing interest against the
respondent has been passed which is barred by time. The Assistant
E Commissioner dismissed the appeal of the respondent on 27. 7.1991. The
respondent filed second appeal before the Sales Tax Tribunal which passed
the order dated 21. 7.1998 remanding the case to the assessing authority for
decision after giving notice to the respondent. The respondent filed a Trade
Tax Revision before the High Court against the order of the Tribunal and the
High Court by the impugned order dated 16.9.1999 allowed the revjsion of
F the respondent. Aggrieved by the impugned order, the State has preferred the
above appeal by way of special leave.

We heard Mr. R.G. Padia, learned senior counsel appearing for the
appellant and Mr. Ranbir Singh Yadav, learned counsel appearing for the
respondent.
G
Learned senior counsel appearing for the appellant submitted that the
order of the High 'Court to the extent that a notice of demand was necessary
before passing the order of interest is legally not sustainable. He further
submitted that the levy of interest is by operation of law and does not require
H a separate order.
COMMR. OF TRADE TAX v. KANHAI RAM THEKEDAR [LAKSHMANAN, J.) 987

Learned counsel appearing for the respondent submitted that the A.
impugned assessment order passed by the assessing authority dated 30. 7 .1990
does not refer to any notice served upon the dealer before passing the impugned
order and, therefore, the said order has been quashed by the Tribunal in
respect of remanding the matter. It was also submitted that the rectification
order could be passed within three years from the date of the order of the B
- assessment or the order passed in appeal or revision. The impugned order
was passed beyond the period of three years and, therefore, the said order is
not sustainable. In this background of facts, the following questions of law
arise for consideration by this Court :

......
I
1. Whether no subsequent proceeding can be initiated against the
revisionist as the subsequent proceeding to the assessment is barred
c
by limitation?
2. Whether the order of the High Court to the extent that a notice
of demanct was necessary before passing the order of interest is
legally sustainable?
D
We have. carefully perused the entire pleadings, orders passed by the
authorities and the High Court and the annexure filed along with this appeal.

In this case, the assessment order for the assessment year 1977-78 was
passed on 6.6.1986 imposing tax liability of Rs. 18053.98 paise. The
respondent deposited the tax in two instalments namely, 2,817/- on 26.6.1982 E I

and Rs. 15,236.98 paise on 30.8.1986. The assessing authority passed another
order on 30.7.1990 holding that on admitted amount of tax it was liable to
.,.._ pay interest at the rate of 24% p.a. from 1.5.1978 on amount of tax the
assessee has not deposited. The assessing authority held that the dealer was
liable to pay interest to the tune of Rs. 33,291. The respondent-dealer filed F
first appeal against the said order which was dismissed. Against that order,
the second appeal was filed before the Tribunal, which remanded the matter
to the assessing authority for fresh decision after giving an opportunity of
hearing to the dealer. Feeling aggrieved, the dealer filed a revision before the
High Court. The dealer submitted that the amount of tax was deposited by
30.8.1986. G'

-- The liability for payment of interest arises in view of the provisions
contained in Section 8 (1), 8(1-B) and sub-section (2) of Section 8 of the U.P.
Sales Tax Act,1948 (now the U.P. Trade Tax Act, 1948) (for short "the
Act"). The relevant portion of Section 8 read as under:
ff,
988 SUPREME COURT REPORTS [2005) 3 S.C.R.

A "8. Payment and recovery of tax

(1) The tax admittedly payable shall be deposited within the time
prescribed or by the thirty first day of August, 1975, whichever
is later, failing which simple interest at the rate of 2 per cent per
mensem shall become due and be payable on the unpaid amount
B with effect from the day immediately following the last date
prescribed till .the date of payment of such amount, whichever is
later, and nothing contained in section 7 shall prevent or have the
effect of postpo!?-ing the liability to pay such interest.

Explanation - For the purpose of this sub-section, the tax admittedly
c payable means the tax which is payable under this Act on the turnover
of sales or, as the case may be, the turnover of purchases, or of both,
as disclosed i1_1 the accounts maintained by the dealer, or admitted by
him in any return or proceeding under this Act, whichever is greater,
or if no accounts are maintained then according to the estimate of the
dealer, and includes the amount payable under Section 3-B or sub-
D section (6) of Section 4-B.

(l-A) The tax assessed under this Act shall be deposited in the manner
specified in, and within thirty days of the service of, the notice of
assessment and demand.

E (1-B) If the tax, other than the tax referred to in sub-section (l),
assessed by any Assessing Authority is not paid within the period
specified in the notice of assessment and demand referred to in sub-
section (I-A), simple interest at the rate of one and half per cent per
mensem on the unpaid amount calculated from the date of expiration
of the period specified in such notice shall become due and be payable.
F
(lBB) If the tax, assessed under this Act is enhanced in reassessment
or otherwise by any authority, tribunal or court the dealer shall also
be liable to pay simple interest at the rate specified in sub-section (1-
B) on the unpaid amount of the enhanced tax from the date of
expiration of the period specified in such notice of assessment and
G
demand already served on the dealer under sub-section (l_-A) and it
shall not be necessary to give a fresh notice of assessment and demand
with respect to the enhanced tax and it shall be deemed that the tax
so enhanced was _assessed in the order of assessment made for the
first time.
H
COMMR. OF TRADE TAX'" KAN HAI RAM Tl-IEKEDAR [LAKSl-IMANAN, J .) 989

( l-C) The amount of interest payable under sub-section (I), ( l-B) (I- A
BB) and (2) shall be without prejudice to any other liability or penalty
that the dealer may incur under this Act or under any other law for
the time being in force, and shall be added to the amount of tax and
be also deemed for all purposes to be part of the tax.

(2) Where realization of any tax remained stayed by any order of any B
Court or authority and such order of stay is subsequently vacated, the
interest referred to in sub-section (l-B) shall be payable also for any
period during which such order remained in operation.

(2-A) Notwithstanding anything contained in sub-section (I), (I-A),
(l-B), (I-BB), (l-C) or (2) the Commissioner may on the application C
of a manufacturer within such time and in such manner as may be
prescribed grant in lieu of exemption under section 4-A moratorium
for payment of the admitted tax subject to such conditions as may be
prescribed. The Commissioner may withdraw any such moratorium
in the circumstances in which it could have withdrawn the exemption D
under section 4-A, but no such withdrawal shall be made with
retrospective effect.

Provided that on and after commencement of the Uttar Pradesh Trade
Tax (Amendment) Ordinance, 1997, the Commissioner may on the
application of a manufacturer having a small scale industry, the date E
of starting production of which falls on or after April I, l 990, grant,
in lieu of exemption under section 4-A, moratorium for payment of
the admitted tax and the provision of rule 43 of the Uttar Pradesh
Trade Tax Rules, 1948, as amended by the Uttar Pradesh Trade Tax
(Second amendment) Rules, 1993, shall apply for granting such
moratorium.
I
F
(2-B) Notwithstanding anything contained in any other provision of
this Act and rules made thereunder, the State Government may grant
moratorium from payment of the admitted tax to a Power Project
Industrial Unit, subject to such conditions as may be prescribed.
G
(3) Notwithstanding anything contained in any law or contract to the
contrary, the assessing authority may, at any time or from time to
time, by notice in writing, a copy of which shall be forwarded to
the dealer at his last address ·known to the assessing authority,
require -
H
990 SUPREME COURT REPORTS [2005] 3 S.C.R.

A (a) any person from whom any amount is due or may become
due to the dealer, or

(b) any person who holds or may subsequently hold money for
or on account of the dealer,

to pay to the assessing authority
B
(i) forthwith upon the money becoming due or being held, or

(ii) at or within the time specified in the notice, not being before
the money becomes due or is held,·so much of the money
as is sufficient to pay the amount due by the dealer in respect
c of arrears of tax or other due under this Act, or the whole
of the money when it is equal to or less than that amount.

Explanation - For the purpose of this sub-section, the amount due to
a dealer or money held for or on account of a dealer by any person
shall be computed after taking into account such claims, if any, as
D may have fallen due for payment by such dealer to such person and
as may be legally subsisting."

The High Court was of the view that even if the dealer was liable to
pay interest on delayed payment of amount of tax, a notice in writing before
.
~-
E passing the impugned order was necessary which is not shown to have been
done in the present case. The impugned order dated 30. 7.1990 nowhere states
that any notice was sent to the dealer, therefore, such an order could not be
sustained. Consequently, the Tribunal has committed an error in passing the
impugned order dated 21. 7 .1998 remanding the matter to the assessing
authority. Holding so, the High Court allowed the revision and quashed the
F order of the TriLnal.

In our opinion, the order passed by the High Court is absoli.Jtely illegal.

In the case of Commissioner of Sales Tax v. Qureshi Crucible Center,
[1993] suppl 3 SCC 495, the Commissioner of Sales Tax was the appellant.
G The appeal was preferred against the judgment of the learned single Judge of
the Allahabad High Court allowing the sales tax revision filed by the assessee.
After referring to Section 8(1 ), this Court held as under :

"According to this section, a dealer shall have to deposit the tax
admittedly payable either within the time prescribed or by August 31,
H 1975 whichever is later. If he fails to do so, simple interest at the rate

r
COMMR. OF TRADE TAX v. KAN HAI RAMTHEKEDAR[LAKSHMANAN,J.) 991
of 2% per mensem becomes payable. This levy of interest is by A
operation of law. It does not require a separate order as such by any
authority. The explanation defines the expression "tax admittedly
payable". It means the tax which is payable, inter alia, according to
the return filed by the dealer.

In this case, the dealer filed a return for the assessment years B
1975-76. The goods in which he was dealing fell within the category
of unspecified goods. For unspecified goods, the rate of tax prior to
December 1, 1973 was 3 .5%. With effect from the said date, however,
the rate was revised to 7%. In the return filed by the respondent-
I
assessee, he arrived at the tax admittedly payable on the turnover
disclosed by him, by applying rate of 3.5%. The authorities held that
c
inasmuch as he has not paid the tax admittedly payable within the
meaning of Section 8(1) inasmuch as he has not calculated and paid
the tax at the rate prescribed by law - he must be held to have failed
to comply with the requirement of Section 8(1). Accordingly, interest
as prescribed by the said section was levied. The appellate authority D
as well as the Tribunal affinned the said levy. The matter was carried
to the High Court by way of a revision. The learned Judge allowed
the revision holding that "there has been no finding by the Tribunal
that the assessee acted mala fide in not depositing the tax at the rate
of 7%. The demand of interest was not justified."
E
In the case of The Sales Tax Officer, Sector /, Kanpur and Anr. v.
Mis Dwarika Prasad Sheo Karan Dass, [1977) 1 SCC 22, this Court has held
that the assessee is liable to pay interest under Section 8(1-A) of the U.P.
Sales Tax Act, 1948 on unpaid amount of tax and that such liability arises
automatically by operation of law. This Court also held that fresh notice of
F
demand not necessary where amount of tax or other dues reduced as a result
of the appeal, revision or other proceedings.

This Court had an occasion to consider sub-Section (1-A) of Section 8
of the Act in the case of Haji Lal Mohd Biri Works v. State of U.P., [1974]
3 sec 137 and held that the liability to pay interest under Section 8(1-A) of G

- the Act is automatic and arises by operation of law. It was further observed
in that case that it is not necessary for the Sales Tax Office.r to specify the
amount of interest in the recovery certificate.

This Court had also considered the question whether it was necessary
for the Sales Tax Officer to issue a fresh notice of demand to the respondent H

' ' ' '
992 SUPREME COURT REPORTS (2005] 3 S.C.R.

A after the tax assessed by the Sales Tax Officer was reduced on appeal and
further reduced on revision. This Court after considering sub-Section (9)
which has been added ir. Section 8 of the Act by the U.P. Sales Tax
(Amendment) Act (3 of 1971) held that it shall not be necessary to the
assessing authority to serve upon the dealer a fresh notice. Similar view was
B taken by the Allahabad High Court in the case of Firm Parshuram Rameshwar
Lal v. State of U.P., [1974] 33 STC 540 (All) which has also been referred
to in this judgment.

In view of the above, this Court accepted the appeal filed by the Sales
Tax Officer and set aside the judgment of the High Courf and dismissed the
C writ petition filed by the assessee.

In the case of Prahlad Rai and Ors. v. Sales Tax Officer, Meerut and
Ors., [1991] Supp 2 SCC .612; this Court had an occasion to consider the
payment of interest on arrears of sales tax. In this case, the assessee contended
that he had admittedly paid the entire arrears of sales tax voluntarily and,
D therefore, they did not become defaulters and not liable to pay interest.
Rejecting the said argument, this Court held that the accrual of interest is
automatic and no separate notice of demand was required to be served in that
respect.

Thus, we are of the opinion that the High Court was not justified for
E deleting the interest levied by the authorities on the ground that no notice was
served. In this view, the impugned judgment would nonnally be unsustainable.
However, as already noticed, the respondent-assessee has specifically urged
that the subsequent proceedings to the assessment is barred by limitation and
that even though the order was passed on 6.6.1986 imposing tax liability etc.,
F the assessing authority had passed another order only on 30. 7 .1990 holding
that on admitted amount of ta.-., the assessee was liable to pay interest at 24%
p.a. from 1.5.1978 and, therefore, on the question of delay in demanding
interest, the demand has to be set aside. This argument of the learned counsel
appearing for the respondent merits acceptance. In this case, the assessment
relates to the assessment years 1977-78. The respondent furnished his return
G to the assessing authority and the assessing authority passed an assessment
order against the respondent and in accordance with the assessment order, t.he
assessee has deposited the entire amount of tax amounting to Rs. 15,236.98
paise on 30.8.1986 and Rs. 2,817 on 26.6.1982. However, on 30.7.1990, the
--
assessing authority passed an order imposing interest against the respondent.
H Thus the demand was after nearly four years. There was no demand of
COM MR. OF TRADE TAX'' KANHAI RAM THEKEDAR [LAKSHMANAN, J.] 993
interest in the assessment order which, in our opinion, fonn part of the A
assessment order. As the assessment order did not include a claim for interest,
the demand for interest haJ to be made within a reasonable period thereafter.
To be noted that for rectification of the assessment order, a limitation period
of three years is laid down. Since the demand of interest was made after
almost four years, we hold that the demand is not within a reasonable period B
and the assessee is not liable to pay the interest as demanded. The Department
is not entitled to recover the interest from the assessee-respondent but is at
liberty to recover the amount of interest demanded from the Assessing Officer
concerned who have not taken steps for four years.

We are in entire agreement with the law laid down by this Court on the C
interpretation of Section 8 of the Act in the judgments referred to above. But
we, however, hold that the demand of interest was not justified because of
the inordinate delay on the part of the officers concerned for raising the
demand of interest from the assessee and in the peculiar facts and
circumstances of this case.
D
The civil appeal, accordingly, stands dismissed. However, there shall
be no order as to costs.

B.B.B. Appeal dismissed.