Supreme Court clarifies interest liability on excise dues during stay orders: State of U.P. vs. Prem Chopra (25 March 2022)

Introduction

Date of the Judgment: 25 March 2022

Citation: Civil Appeal No. 2417 of 2022 (Arising out of S.L.P. (Civil) No. 15330 of 2019)

Judges: S. Abdul Nazeer, J. and Vikram Nath, J.

Can a person who has been granted a stay order by a court, be exempted from paying interest on dues if the stay order is later vacated? The Supreme Court of India recently addressed this question in a case concerning excise revenue. The core issue revolved around whether a licensee should pay interest on outstanding excise dues for the period during which a High Court order had temporarily halted the recovery of those dues. This judgment clarifies the interplay between court-ordered stays and the statutory obligation to pay interest on delayed payments. The bench consisted of Justice S. Abdul Nazeer and Justice Vikram Nath, with the judgment authored by Justice S. Abdul Nazeer.

Case Background

In 2002, the Government of Uttar Pradesh announced its Excise Policy for the year 2002-03. Following this, the District Magistrate of Lakhimpur Kheri issued an advertisement for the settlement of excise shops. Prem Chopra, the respondent, applied for and was granted a license for a country liquor shop in Mohammadi No. 1, Lakhimpur Kheri, for the period from April 1, 2002, to March 31, 2003, with an annual license fee of Rs. 29,52,000.

In December 2002, the respondent applied to surrender his license. By this time, he had lifted a quota of liquor worth Rs. 20,35,212. The appellants notified him on January 6, 2003, that his surrender application would only be considered after he deposited the balance license fee of Rs. 9,16,788. A subsequent notice on January 25, 2003, reiterated this demand.

The respondent then filed a writ petition before the High Court of Judicature at Allahabad, which directed him to appeal before the Additional Commissioner Excise. The Excise Commissioner dismissed his appeal on April 23, 2003, holding him liable for the entire dues under Rule 19 and Section 36 of the U.P. Excise Act, 1910. A subsequent revision petition was also dismissed on July 18, 2003.

After the license cancellation, the District Excise Officer recalculated the dues, adjusting the security deposit of Rs. 2,95,200 and determined that the respondent still owed Rs. 6,43,562. The respondent then filed another writ petition before the High Court, which initially stayed the recovery proceedings on the condition that the respondent deposit Rs. 2,75,000.

The High Court dismissed the writ petition for non-prosecution on December 21, 2015. The respondent deposited the remaining amount of Rs. 3,68,562 in 2017 but did not pay any interest. The High Court recalled the dismissal order on January 19, 2018. Subsequently, the department issued a notice on January 10, 2018, demanding Rs. 10,08,210.51 as interest. The High Court then set aside the interest demand, leading to the current appeal before the Supreme Court.

Timeline:

Legal Framework

The core legal provision at the heart of this case is Section 38-A of the U.P. Excise Act, 1910, which deals with interest on arrears of excise revenue. The provision states:

“38-A. Interest on arrears of excise revenue –
(1) Where any excise revenue has not been paid within three months from the date on which it become payable, interest at such rate not exceeding twenty-four per cent per annum, as may be prescribed, shall be payable from the date such excise revenue becomes payable till the date of actual payment:
Provided that until a higher rate is prescribed, the rate of interest will be eighteen per cent per annum.”

This section mandates that if excise revenue is not paid within three months of becoming due, interest is payable from the due date until the actual payment date. The Act also includes Section 36, which makes the licensee liable to pay the license fee.

Arguments

The appellants argued that the respondent was liable to pay the license fee for the entire year 2002-03, even after surrendering the license. They contended that the respondent did not pay the license fee from January 2003 to March 2003 and unsuccessfully challenged the demand for payment. The appellants further argued that the interim order granted by the High Court only restrained them from collecting the license fee, but did not prohibit the respondent from depositing the dues. They asserted that upon dismissal of the writ petition, the respondent should have paid the accrued interest.

The respondent argued that the High Court’s interim order restrained the appellants from recovering the license fee, and since he paid the dues in 2017, the appellants were not justified in demanding interest for the period during which the stay was in effect.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the respondent is liable to pay interest for the period during which recovery of license fee under Section 36 of the U.P. Excise Act, 1910, was stayed by the High Court, and eventually when the writ petition was dismissed.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on several key authorities to reach its decision:

Cases:

• Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association CSI CINOD Secretariat, Madras [(1992) 3 SCC 1]: The Supreme Court distinguished between quashing an order and staying its operation. Quashing an order restores the original position, while a stay only suspends the order’s effect from the date of the stay order.
• Kanoria Chemicals and Industries Ltd. and Others v. U.P. State Electricity Board and Others [(1997) 5 SCC 772]: The Court held that a stay order ends with the dismissal of the substantive proceedings, and the parties should be placed in the same position as if the interim order had not been passed.
• Rajasthan Housing Board and Others v. Krishna Kumari [(2005) 13 SCC 151]: The Court observed that a temporary injunction is granted at the risk of the person who obtains it. If the case is decided against them, they are liable to pay interest on any arrears stayed by the injunction.
• South Eastern Coalfields Ltd. v. State of M.P. and Others [(2003) 8 SCC 648]: The Court held that the principle of restitution applies, and the party who benefited from an interim order must restore the other party to the position they would have been in without the order.
• Nava Bharat Ferro Alloys Limited v. Transmission Corporation of Andhra Pradesh Limited and Another [(2011) 1 SCC 216]: The Court held that a party who fails in the main proceedings cannot take benefit from the interim order issued during the pendency of such proceedings.
• State of Rajasthan and Another v. J.K. Synthetics Limited and Another [(2011) 12 SCC 518]: The Court held that unless specified otherwise, the beneficiary of an interim stay order must pay interest on the amount withheld due to the order upon dismissal of the proceedings.

Legal Provisions:

• Section 38-A of the U.P. Excise Act, 1910: This provision mandates the payment of interest on arrears of excise revenue.
• Section 36 of the U.P. Excise Act, 1910: This provision makes the licensee liable to pay the license fee.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association CSI CINOD Secretariat, Madras [(1992) 3 SCC 1]*: The Court used this case to distinguish between quashing and staying an order, emphasizing that a stay only suspends operation, not the existence of the order.

✓ Kanoria Chemicals and Industries Ltd. and Others v. U.P. State Electricity Board and Others [(1997) 5 SCC 772]*: The Court relied on this case to support the principle that a stay order ends with the dismissal of the substantive proceedings, and the parties should be restored to their original position.

✓ Rajasthan Housing Board and Others v. Krishna Kumari [(2005) 13 SCC 151]*: The Court applied the principle that a temporary injunction is at the risk of the person obtaining it, who is liable for interest if they lose the case.

✓ South Eastern Coalfields Ltd. v. State of M.P. and Others [(2003) 8 SCC 648]*: The Court applied the principle of restitution, stating that the party who gained from an interim order must restore the other party to their original position.

✓ Nava Bharat Ferro Alloys Limited v. Transmission Corporation of Andhra Pradesh Limited and Another [(2011) 1 SCC 216]*: The Court followed the principle that a party who fails in the main proceedings cannot take benefit from the interim order issued during the pendency of such proceedings.

✓ State of Rajasthan and Another v. J.K. Synthetics Limited and Another [(2011) 12 SCC 518]*: The Court followed the principle that the beneficiary of an interim stay order must pay interest on the amount withheld due to the order upon dismissal of the proceedings.

The Supreme Court held that the High Court erred in setting aside the demand for interest. The Court emphasized that an interim order of stay only temporarily suspends the recovery of dues, but does not eliminate the underlying liability to pay. The Court stated that once the writ petition was dismissed, the interim order ceased to have effect, and the respondent became liable to pay interest for the period during which the recovery was stayed. The Court relied on the principle of restitution, which requires parties to be placed in the same position they would have been in had the interim order not been passed. The Court noted that the respondent was not prohibited from depositing the dues during the stay period and that the High Court had not quashed the demand for license fee.

The Court observed that the respondent’s failure to pay the dues on time resulted in the accrual of interest, which he was obligated to pay. The Court also highlighted that if interest were not charged, it would encourage unscrupulous debtors to file writ petitions to obtain stay orders, thus gaining a financial benefit from unjust litigation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the principle of restitution and the interpretation of the effect of a stay order. The Court emphasized that a stay order does not extinguish the underlying liability to pay dues, but merely suspends the recovery process. The Court also highlighted the importance of ensuring that parties are placed in the same position they would have been in had the interim order not been passed. This is to prevent unjust enrichment of the party that obtained the stay order.

The court’s reasoning was influenced by the need to maintain fairness and prevent abuse of the legal process. The Court was concerned that allowing parties to avoid interest payments by obtaining stay orders would encourage frivolous litigation.

The court’s reasoning was primarily based on the legal principles and precedents related to stay orders and restitution. While the factual aspects of the case were considered, the legal interpretation of the stay order and its implications was the dominant factor in the decision.

Logical Reasoning

Key Takeaways

• ✓ A stay order only temporarily suspends the recovery of dues; it does not eliminate the underlying liability to pay.
• ✓ Upon dismissal of a writ petition, any interim stay order granted earlier ceases to have effect, and the parties must be restored to their original positions.
• ✓ The principle of restitution requires that parties who have benefited from an interim order must restore the other party to the position they would have been in had the order not been passed.
• ✓ Failure to pay dues on time results in the accrual of interest, which the debtor is obligated to pay, even if recovery was temporarily stayed by a court order.
• ✓ Courts must ensure fairness and prevent the abuse of legal processes, including the use of stay orders to avoid financial obligations.

This judgment has significant implications for future cases involving stay orders and financial obligations. It clarifies that a stay order is not a waiver of liability but a temporary suspension of recovery. This ensures that parties cannot use stay orders to avoid their financial responsibilities and that the principle of restitution is upheld.

Directions

The Supreme Court allowed the respondent to make an application under the one-time settlement scheme of 2021 within eight weeks from the date of the judgment. The concerned authority was directed to consider the application in accordance with the law.

Specific Amendments Analysis

There were no specific amendments discussed in this judgment.

Development of Law

The ratio decidendi of this case is that an interim stay order only suspends the recovery of dues temporarily and does not eliminate the underlying liability to pay. The dismissal of the proceedings lifts the stay, and the parties must be restored to their original positions, including the payment of interest on delayed dues. This judgment reinforces the principle of restitution and prevents the misuse of stay orders to avoid financial obligations. This case does not change the previous position of law but rather reinforces the existing legal principles.

Conclusion

The Supreme Court’s judgment in State of U.P. vs. Prem Chopra clarifies that a stay order does not absolve a party from the liability to pay interest on delayed dues. The Court emphasized that the principle of restitution requires that parties be placed in the same position they would have been in had the interim order not been passed. This decision ensures that stay orders are not used to avoid financial obligations and reinforces the importance of timely payments. The Supreme Court allowed the appeal, setting aside the High Court’s order and holding the respondent liable to pay interest on the outstanding excise dues.