Facts of the Case

The petitioner, Kannan Paint & Radhas Hardware, a registered dealer under the GST Act, 2017, was liable to pay the Kerala Flood Cess (KFC) at 1% of its tax liability, applicable from 01.08.2019 to July 2021. The petitioner remitted the KFC through its GSTR-3B returns instead of the dedicated KFC-A form, effectively depositing it in the wrong head in the Central Government Cess Pool. On being informed of this by a notice dated 19.03.2021, followed by a further notice dated 02.06.2022, the petitioner did not respond to the first notice but replied to the second. The High Court of Kerala at Ernakulam, by an interim order dated 19.07.2022, directed a refund of the flood cess paid under GSTR-3B, which the petitioner then redeposited as KFC-A on 04.08.2022, along with interest paid under protest, giving rise to the present dispute over entitlement to a refund of that interest.

Issues Involved

  1. Whether the petitioner, having remitted the Kerala Flood Cess in the wrong head through GSTR-3B in good faith, was liable to pay interest for the period the cess remained wrongly credited.
  2. Whether Section 77 of the CGST Act and the ruling in Shree Nanak Ferro Alloys Pvt. Ltd. exempted the petitioner from interest liability altogether.
  3. How liability for interest should be apportioned given the petitioner's own delay in responding to the department's notices.

Petitioner's Arguments

  • The KFC had been paid on time, albeit in the wrong account, and once refunded pursuant to the Court's interim order, the petitioner promptly redeposited it as KFC-A along with interest paid only under protest, since payment of interest was a precondition to successfully uploading the KFC-A form.
  • Relying on Section 77 of the CGST Act and the Jharkhand High Court's decision in Shree Nanak Ferro Alloys Pvt. Ltd. v. Union of India, the petitioner contended it was not liable to pay any interest at all, since the tax/cess had genuinely been paid, only under an incorrect head.
  • The petitioner was therefore entitled to a full refund of the interest paid under protest.

Respondent's Arguments

  • The petitioner did not respond to the department's first notice dated 19.03.2021 and reacted only to the second notice dated 02.06.2022, over a year later.
  • Had the petitioner responded to the earlier notice, it could have avoided interest at least from 19.03.2021 onward.
  • The petitioner could not be permitted to benefit from its own default — first by depositing the cess under the wrong head, and then by failing to respond to the notice pointing this out — while simultaneously claiming a full refund of interest.

Court Order/Findings

  • The Court observed that this was a case from the initial GST period, when genuine difficulties were faced even by tax experts, and that the petitioner had committed a bona fide mistake in depositing the KFC through GSTR-3B rather than filing the dedicated KFC-A return.
  • At the same time, the State was denied the flood cess from 01.08.2019 until 04.08.2022, and the petitioner had not been vigilant, having left the March 2021 notice unanswered.
  • Balancing these facts, the Court held the petitioner should bear interest only for the period 01.04.2021 to 31.07.2022 and was entitled to refund of interest for the remaining period within three weeks, with no penalty or late fee for the mis-remitted KFC.

Important Clarification

Where a taxpayer bona fide deposits a cess or tax component under the wrong head due to genuine confusion in the early phase of a new tax regime, interest liability need not be imposed for the entire period of default; courts may apportion interest liability, holding the taxpayer liable only from the point at which its own lack of diligence (such as failing to respond to a departmental notice) contributed to the continuing default, while granting refund of interest for the earlier bona fide period.

Sections Involved

  • Section 77, Central Goods and Services Tax Act, 2017 — deals with tax wrongfully collected and paid to the Central Government or State Government and its rectification without interest in specified circumstances.
  • Kerala Flood Cess notification/scheme — levied at 1% of GST tax liability from August 2019 to July 2021, collected through a dedicated KFC-A return.

Decision – In Favour of

The writ petition was disposed of in part in favour of the Assessee. The petitioner secured a refund of interest for the period it can be regarded as having acted bona fide, and a waiver of penalty and late fee for the mis-remittance, but it was not granted a full waiver of interest as claimed, since the Court also held it liable for interest during the period of its own delay in responding to the department's notice.

Related Case Laws

No directly on-point case notes are currently published on this site.

Case Details

  • Court: High Court of Kerala at Ernakulam
  • Case No.: WP(C) No. 21570 of 2022
  • CNR: Not available
  • Coram: Hon'ble Mr. Justice Dinesh Kumar Singh
  • Decision Date: 2023-11-17
  • Disposal Nature: Disposed of (partial interest refund directed)

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