Madras HC Imposes Rs. 10,000 Token Penalty for Wrongful Input Tax Credit Availment, Finds No Fraud or Wilful Suppression of Facts [Read Order]

The Madras High Court imposed a token penalty of Rs. 10,000 for wrongful availment of Input Tax Credit ( ITC ) which was not eligible to be availed, but could have resulted in wrong utilisation. The court found no wilful misstatement or suppression of facts or fraud.

The Petitioner, Greenstar Fertilizers Limited is a Central Excise Assessee under the provisions of the Central Excise Act, 1944 r/w. Central Excise Rules, 2002. With the implementation of GST with effect from 01.07.2017, the petitioner transitioned various amounts as input tax credit under Section 142 of the CGST Act, 2017.

The petitioner has reversed a sum of Rs.11,27,932/- before the issuance of the above mentioned show cause notice dated 26.07.2021. Under these circumstances, the second respondent had earlier confirmed the penalty and interest on the petitioner

The writ petition is opposed by the learned Senior Counsel for the respondents on the ground that the impugned order of the first respondent does not warrant any interference, as it is in accordance with the provisions of the CGST Act, 2017.

The petitioner admitted to wrongly transitioning credit under Section 142 of the CGST Act, 2017. Consequently, proceedings were initiated against the petitioner via a show cause notice dated 26.07.2021 under Section 74 of the CGST Act, 2017. Following the issuance of this notice, the petitioner reversed the amounts listed in Serial Nos. 1 to 3 of the referenced Table on the specified dates.

The Senior Standing Counsel for the respondents argued that the impugned order by the first respondent, upholding the penalty under Sections 74(1) and 74(5) of the CGST Act, is well-founded and does not warrant interference.

The Counsel stated that, according to these sections, penalties must be levied regardless of whether the credit was merely availed or utilized, as the law clearly penalizes credits wrongly availed or utilized due to fraud, willful misstatement, or suppression of facts with intent to evade tax.

The bench of Justice S. Saravanan observed that sustaining the penalty under Section 74(1) and 74(5) of the CGST Act is unsustainable.

The court cited a similar case which the same court has dealt with before.  Aathi Hotel, Rep. by its Proprietor S.Vaithiyanathan vs. Assistant Commissioner (ST) (FAC)where it was observed that “Though under Sections 73(1) and 74(1) of the Act, proceedings can be initiated for mere wrong availing of Input Tax Credit followed by imposition of interest penalty either under Section 73 or under Section 74 they stand attracted only where such credit was not only availed but also utilised for discharging the tax liability. The proper method would have been to levy penalty under Section 122 of TNGST Act, 2017”

Thus, the Madras High Court viewed that  imposition of penalty under the peculiar facts and circumstances of the case is unjustified. However, considering the fact that the petitioner has availed input tax credit, which was not eligible to be availed, but could have resulted in wrong utilization of input tax credit, a token penalty of Rs.10,000/- is imposed on the petitioner.

Further, the bench stated that the observation of the first respondent- Joint Commissioner (Appeals) by placing reliance on the decisions of the Hon'ble Supreme Court in Punjab Tractors Ltd. vs. Commissioner of Central Excise, Chandigarh, is also not relevant as Section 74 of the CGST Act deals with a situation where the credit is availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.

The partition was allowed accordingly. Mr.S.Ganesh appeared for the petitioner and Mr.N.Dilipkumar appeared for the respondents.

To Read the full text of the Order CLICK HERE

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