Facts of the Case

This case concerns the Service Tax Voluntary Compliance Encouragement Scheme (VCES), 2013 — a pre-GST amnesty scheme — not the present-day GST law, even though the petitioner had since migrated to GST. The petitioner, M/s Sav Constructions, a works-contract civil construction firm registered under the erstwhile Service Tax regime, availed VCES under the Finance Act, 2013, declaring a tax liability of Rs. 57,89,270. Under the scheme, 50% of the declared tax was payable by 31 December 2013 and the balance by 30 June 2014 (extendable to 31 December 2014, with interest).

The petitioner paid 50% on time, but paid the remaining Rs. 13,89,270 only on 21 February 2015 — after the extended 31 December 2014 deadline. Following an audit objection by the Office of the Accountant General, the Department directed the petitioner to pay interest on the entire declared tax liability of Rs. 57,89,270, not merely on the belatedly-paid Rs. 13,89,270, on the ground that violating the scheme's conditions forfeited its benefits altogether.

Issues Involved

  1. Whether interest under Section 110 of the Finance Act, 2013 is payable on the entire declared tax liability, or only on the portion paid late/remaining unpaid.
  2. Whether the petitioner, having paid 90% of its tax liability on time, could be charged interest as if none of it had been paid on time.

Petitioner's Arguments

  • Section 110 of the Finance Act, 2013 speaks of recovering interest on “such dues” where the declarant fails to pay tax dues fully or in part — meaning only the unpaid portion, not the entire declared liability.
  • In tax law, where two interpretations are possible, the one favourable to the assessee should be preferred, relying on the Supreme Court's ruling in CIT v. Podar Cement Pvt. Ltd.

Respondent's Arguments

  • Under Section 108 of the Finance Act, 2013, immunity from interest/penalty is available only if the declarant pays the entire declared tax dues (plus applicable interest) strictly within the scheme's timelines; the petitioner's default in paying the balance by 31 December 2014 forfeited that immunity for the entire declared amount.
  • The Amnesty Scheme, being in the nature of a settlement, must be strictly construed, and reliance was placed on a Kerala High Court ruling that neither party can resile from settlement terms.

Court Order / Findings

  • The Court held that a plain reading of Section 110 shows that “such dues” refers only to the unpaid portion; reading it as covering the entire declared liability would amount to adding words not found in the statute.
  • Applying the principle that ambiguity in tax statutes should be resolved in favour of the assessee, and noting that the petitioner had in fact paid 90% of its liability within time, the Court held interest could only be levied on the unpaid/belated portion (Rs. 13,89,270), not the full Rs. 57,89,270.
  • The impugned order dated 23 August 2022 was quashed, with a direction to recalculate interest on the Rs. 13,89,270 belated amount alone, and to release the bank account attachment upon its payment.

Important Clarification

Although the petitioner had by this point migrated to the GST regime, the entire dispute concerns interest computation under the erstwhile Service Tax VCES amnesty scheme of 2013, and has no bearing on GST law. Businesses that availed similar amnesty schemes and paid the bulk of their declared dues on time, but defaulted only on a balance instalment, may find this ruling useful in limiting interest exposure to the unpaid portion alone.

Sections Involved

  • Finance Act, 2013 — Sections 107, 108, 110 (Service Tax Voluntary Compliance Encouragement Scheme)

Decision – In Favour of

Decided in favour of the petitioner. The writ petition was allowed, the impugned interest-demand order was quashed, and interest was restricted to the belatedly-paid portion of the declared tax dues.

Case Details

Court: Madurai Bench of the Madras High Court
Case No.: W.P.(MD) No. 25380 of 2022 with W.M.P.(MD) No. 19462 of 2022
Coram: Justice S. Srimathy
Date of Order: 18 July 2023

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