No Penalty for Erroneous ITC Set-Off Under Wrong GST Head: Kerala HC Quashes Assessment Order, Suggests GST Council Intervention [Read Order]

The Kerala High Court has overturned a GST assessment order issued against a registered taxpayer, ruling that the matter of wrongly availing Input Tax Credit (ITC) under an incorrect tax head was previously addressed in favour of the taxpayer by a Division Bench of the same court.

The court said that the taxpayer cannot be penalised for procedural lapse but the state government might seek the GST Council for resolving administrative settlement of payments between the Centre and state tax authorities.

Moothaveettil Elvana Ramesh Kumar, proprietor of Smart Enterprises, Kozhikode, contested an assessment order granted by the State Tax Officer under Section 73 of the Kerala State GST (KSGST) Act, 2017 for the assessment year 2018-19. The department had initiated the proceedings after finding that the petitioner had wrongly claimed his eligible ITC under the Integrated Goods and Services Tax (IGST) head but incorrectly used it to adjust his output tax liability under the Central GST (CGST) and State GST (SGST) heads for the period April 2018 to March 2019.

Counsel for the petitioner submitted that the demand raised by the tax authorities was wholly untenable in law. It was submitted that the specific legal question on cross-utilization of ITC has previously been settled in favour of the taxpayer by the Division Bench of the Kerala High Court in the landmark case of Rejimon Padikapparambil Alex v. Union of India and Others.

The Court on hearing the lawyer for the petitioner, the Central Government lawyer (CGC) for the Union of India and the Government Pleader for the State authorities agreed with the submissions made by the petitioner.

Justice Ziyad Rahman A.A. stated that the legal issue raised in the current petition was squarely covered in favour of the taxpayer by the Division Bench judgement relied upon by the counsel for the petitioner.

Therefore, the court approved the writ petition and annulled the impugned assessment ruling in its entirety. However, the Court provided an important clarification on the wider administrative consequence of such ITC set-offs where the credit in effect affects the income share of the Centre and the State.

The court said that the respondent State government may approach the GST Council, based on the principles put out in the Division Bench judgement to develop a systemic solution for the settlement of these monies between the relevant ministries.

Accordingly, the writ petition was disposed of, giving immediate relief to the taxpayer and keeping the door open for a policy level determination at the GST Council.

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