In a recent ruling, the Madras High Court ruled the imposition of a 100% Goods and Services Tax ( GST ) penalty for erroneous Input Tax Credit ( ITC ) under Section 74 of the GST Act. The court noted with concern that the penalty was imposed without adequate reasons provided.
Jayasri Traders, the petitioner having availed Input Tax Credit ( ITC ) for a car purchase, corrected their error by paying tax dues under Form GST DRC 03 on 12.09.2023. This corrective action was in response to a show cause notice issued by the respondent, leading to the issuance of an impugned order.
The petitioner’s counsel argued that despite remitting the necessary tax amount before the impugned order, Section 74 of applicable GST laws was invoked, resulting in an unwarranted 100% penalty. Hence, they sought reconsideration of the penalty imposition.
Upon instructions, the petitioner agreed to remit 10% of the cess demand specified in the impugned order as a condition for remand.
Respondent’s counsel countered, asserting compliance with principles of natural justice and consideration of the petitioner’s response.
The bench of Justice Senthilkumar Ramamoorthy acknowledged evidence of payment amounting to Rs. 4,78,573/- for the wrongful ITC availment, citing a circular by the CBIC to argue against levying interest, which was relied on by the petitioner. However, the examination of the impugned order revealed that while SGST and CGST dues were settled, the rationale for imposing a 100% penalty under Section 74 lacked clarity.
Consequently, the court set aside the order dated 28.06.2023 on condition that Jayasri Traders remit 10% of the cess demand within two weeks of receiving the court’s decision. Additionally, the petitioner was granted a window to submit a detailed reply to the show cause notice within the same period. The first respondent was directed to afford a fair hearing, culminating in a revised order within three months of receiving the petitioner’s response.
The petitioner, subject to a condition of pre-depositing 10% of the cess demand, successfully petitioned the court to set aside the impugned order. The court has remanded the matter for reconsideration, emphasizing the need for clarity and justification in penalty decisions under GST laws.
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