2025 (7) TMI 1011 - SC - SEBI

Determination of interest liability - Power of Recovery Officer powers u/s 28A of the SEBI Act to impose retrospective interest computed from the date of the original adjudication orders u/s 15-I of the SEBI Act - Recovery proceedings under the SEBI Act is governed by Section 28A read with Sections 220 to 227 228A 229 232 along with the Second and Third Schedules to the Income Tax Act 1961 and the Income Tax (Certificate Proceedings) Rules 1962 Whether interest on penalties imposed by the Adjudicating Officer is payable by the appellants and if so from which date whether from the date of the adjudication orders passed by the Adjudicating Officer or the demand notices issued by the respondent? HELD THAT - The liability of interest is fortified after the enactment of section 28A which is a substantive law. Furthermore Explanation 4 to section 28A inserted on 21.02.2019 explicitly states that interest under section 220 shall accrue from the date the amount became payable. We have already held that the liability to pay penalty stood triggered from the date of adjudication and that no separate notice of demand is necessary. Further in the present case as the adjudication order itself specified the time for payment of the penalty the liability to pay interest would commence upon the expiry of the period mentioned in the assessment notice. An explanation in any law serves to clarify restrict or expand the scope of the main provision. The nature and effect of an Explanation must be understood in the context of the object of the Act and in particular the provision to which the Explanation is inserted. The Explanation introduced in 2019 in our view did not bring about any substantive change but merely clarified the existing legal position. We also foresee another situation where the original adjudication order under the SEBI Act does not specify any time for payment the period of 30 days under Section 220 of the Income Tax Act should be deemed to apply for making the payment failure of which would trigger the liability to pay interest. Thus the adjudication officer s order which specified payment within 45 days effectively operates as a notice of demand rendering any separate demand notice redundant. It is to be pointed out that interest on unpaid penalties is compensatory in nature not penal. Its primary purpose is not to punish the defaulter but to make good the financial loss occurred to the Revenue on account of delay in receiving the payment that was lawfully due. When a penalty is imposed a specific period is granted for compliance. If the payment is not made within that stipulated period the delay deprives the Revenue of the timely use of funds that rightfully belong to the public exchequer. Therefore the accrual of interest upon default is automatic and flows from the nature of the liability serving to compensate for the time value of money and the disruption caused by delayed payment rather than to impose an additional punitive burden Interest must accrue from the expiry of the 45-day compliance period following the adjudication orders dated 28.08.2014. The subsequent demand notices are nothing but reminders and are not the first demand notices before the accrual of liability for interest. Accepting the appellants position would encourage defaulters to delay payment indefinitely under the guise of awaiting formal orders thereby undermining the efficacy of the enforcement framework and resulting in a loss to the revenue. In view thereof the authorities relied upon by the appellants lack persuasive value and we find no infirmity or illegality in the order passed by the Tribunal that would warrant our interference. Accordingly all these appeals stand dismissed. The appellants are directed to pay interest calculated by the respondent within a period of 15 days from the date of receipt of a copy of this judgment. No costs. Consequently connected miscellaneous application(s) if any shall stand closed.

Summary

ISSUES:

• Whether interest on penalties imposed by the Adjudicating Officer under the SEBI Act is payable by the appellants.
• From which date the interest on unpaid penalties should accrue-whether from the date of the adjudication orders or from the date of demand notices issued by the Recovery Officer.
• Whether the Recovery Officer exceeded his jurisdiction by imposing retrospective interest computed from the date of the original adjudication orders despite the absence of any provision for interest in those orders.
• The nature and effect of incorporation or reference of Income Tax Act provisions, particularly Sections 220 and 156, into the SEBI Act for recovery and interest calculation purposes.
• The applicability and retrospective effect of Explanation 4 inserted into Section 28A of the SEBI Act.
• The legal character of interest on unpaid penalties under the SEBI Act-whether compensatory or penal.

RULINGS / HOLDINGS:

• Interest on penalties imposed by the Adjudicating Officer under the SEBI Act is payable by the appellants as a matter of law by operation of Section 28A read with Section 220 of the Income Tax Act, 1961.
• The interest shall accrue from the expiry of the 45-day period stipulated in the adjudication orders dated 28.08.2014, which constitute a clear and enforceable demand, and not from the date of the demand notices issued in 2022.
• The Recovery Officer did not exceed his jurisdiction by computing interest from the date of the adjudication orders, as the liability to pay interest arises upon default after the period fixed in the adjudication order, notwithstanding the absence of express provision for interest therein.
• The provisions of Sections 220 to 227, 228A, 229, 232 and related Schedules and Rules of the Income Tax Act, 1961 are incorporated into the SEBI Act by Section 28A "with necessary modifications" and apply as if they were provisions of the SEBI Act, making penalties recoverable as arrears of income tax including interest.
• Explanation 4 to Section 28A, inserted in 2019, clarifies that interest under Section 220 of the Income Tax Act shall commence from the date the amount became payable, and does not have retrospective effect to alter the legal position as it stood prior to insertion.
• Interest on unpaid penalties is compensatory in nature and not penal, intended to compensate the revenue for delayed payment rather than to punish the defaulter.

RATIONALE:

• The legal framework applied includes Section 28A of the SEBI Act, which incorporates relevant provisions of the Income Tax Act, 1961, including Section 220 governing interest on unpaid amounts, with necessary modifications to apply to SEBI penalties.
• The Court distinguished between "legislation by incorporation" and "legislation by reference," holding that the Income Tax Act provisions are incorporated into the SEBI Act as they stood at the time of insertion of Section 28A, and subsequent amendments like Explanation 4 clarify but do not retrospectively alter liability.
• The adjudication orders imposing penalties fixed a 45-day period for payment, constituting a statutory "notice of demand" for the purposes of interest calculation under the incorporated provisions.
• Reliance on precedent decisions clarified that interest liability arises automatically by operation of law upon default and does not require express mention in the original adjudication order.
• The Court rejected the appellants' contention that interest should only accrue from the date of the Recovery Officer's demand notices, reasoning that such a view would undermine the enforcement framework and encourage delay.
• In affirming the compensatory nature of interest, the Court cited established principles distinguishing interest from penalty, emphasizing the revenue's right to compensation for delayed payment of statutory dues.
• The decision reaffirmed the settled law as laid down in Dushyant N. Dalal v. SEBI and other authorities, confirming SEBI's power to levy interest on penalties from the date the liability crystallized.