Interest is not leviable on tax amounts deposited in the Electronic Cash Ledger before the due date.

In brief

The question

Whether interest under Section 50 of the CGST Act is leviable on tax amounts already deposited in the Electronic Cash Ledger before the due date, but debited at the time of belated filing of returns

The court held

The Court held that interest cannot be charged if the tax amount was lying in the ECL by the due date.

It also directed

The Court allowed the petition and quashed the impugned order dated 17.06.2025 and the recovery notice dated 17.01.2025; directed the respondents to grant the refund of excess interest with 6% statutory interest within six weeks, failing which 12% interest would apply; and imposed a cost of Rs. 5,000 on the respondents for their arbitrary conduct.

01Facts

The petitioner, a manufacturer of chewing tobacco, filed belated GST returns for various periods between 2017 and 2021.

¶ 4

Although the returns were filed late, the petitioner had deposited the tax amounts into the Electronic Cash Ledger (ECL) before the respective due dates (except for April 2021).

¶ 4

Following an audit objection, the respondent authorities issued a notice on 17.01.2025 demanding interest for the period between the due date and the actual date of filing the return (debiting the ECL).

¶ 4

The petitioner applied for a refund of excess interest paid, relying on the High Court’s judgment in Arya Cotton Industries v. Union of India.

¶ 3

The Respondent No. 2 rejected the refund claim on 17.06.2025, asserting that the proviso to Rule 88B of the CGST Rules, which clarifies this issue, is prospective (effective 10.07.2024) and does not apply to the petitioner's prior period.

¶ 5

02Issues

i.Whether interest under Section 50 of the CGST Act is leviable on tax amounts already deposited in the Electronic Cash Ledger before the due date, but debited at the time of belated filing of returns

¶ 9

ii.Whether the benefit of the proviso to Rule 88B of the CGST Rules can be denied to the petitioner on the grounds that the amendment is prospective, despite existing judicial precedent

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03Law Applied

Section 50 of the CGST Act, 2017, regarding interest on delayed payment of tax, and Rule 88B of the CGST Rules.

¶ 3, 11

The precedent Arya Cotton Industries v. Union of India (2024) 130 GSTR 81, which established that interest is compensatory and cannot be levied if the tax amount is already deposited in the ECL, as such funds are effectively "advance tax" and the State is not deprived of the money.

¶ 9, 12

Reference to the 53rd GST Council Meeting minutes, which led to the insertion of the Proviso to Rule 88B via Notification No. 12/2024.

¶ 10-11

Provisions in the judgment · 4 · Linked ones open on LawLens

Central Goods and Services Tax Act, 2017 Section 107 Section 50 Section 39 Section 49

04Reasoning

The Court reasoned that the Electronic Cash Ledger deposit constitutes a credit to the Government account, and subsequent debiting during return filing is merely an accounting adjustment.

¶ 9, citing Arya Cotton

It held that a literal and mechanical interpretation of Section 50—charging interest even when funds were available in the ECL—would transform a compensatory levy into a penalty.

¶ 9

The Court observed that the Proviso to Rule 88B was specifically introduced to align the law with the Arya Cotton judgment.

¶ 10

The Court condemned the respondents' "selective denial," noting that while they acknowledged the ratio of Arya Cotton, they sought to bypass it by claiming the statutory amendment was only prospective.

¶ 13

The Court found this approach arbitrary and a failure to apply judicial mind to established law.

¶ 14