Madras High Court Holds That Penalty Under Section 73/ 74 Cannot Be Imposed

BRIEF FACTS OF THE CASE

• The Petitioner¹ challenged the order confirming the demand for wrong availment of transitional credit amounting to INR 30,33,615/- along with interest and penalty under section 74 of Central Goods and Services Tax Act [CGST Act]. It was an undisputed fact that the Petitioner had reversed the wrongly availed transitional credit before the issuance of show cause notice.
• Aggrieved by the order of the adjudicating authority, Petitioner filed appeal before the first appellate authority where the demand to the extent of interest was set aside and demand on account of penalty was upheld.
• Since the constitution of Tribunal [Second Appellate authority] was pending, the Petitioner preferred the writ before the Hon'ble Court. The Petitioner challenged the imposition of penalty on grounds that there was no loss to the revenue as transitional credit was never utilized by the Petitioner and penalty under section 74 of CGST Act can only be imposed for wrongful acts and non-compliance that result in actual revenue loss to the Government. In view of this, the Petitioner prayed before the Hon'ble Court to set aside the penalty.

KEY OBSERVATIONS OF MADRAS HIGH COURT

• The Hon'ble High Court relied on the decision in the case of Aathi Hotel vs. Assistant Commissioner² , where it had held that interest can be imposed only the wrongful availment and utilization of the transitioned credit and that imposition of penalty on mere wrongful availment of transitional credit under section 74 is unsustainable, unless the ingredients to justify the invocation of section 74 of the CGST Act are also invoked.
• Further, the Hon'ble High Court observed that proceedings under section 74 can be initiated on wrongful availment of credit, however, for the imposition of penalty, the proper method would have to levy penalty under section 122 of the CGST Act. In view of this observation, the Court imposed a penalty of INR 10,000/- as the wrongly availed credit could have resulted into wrong utilization of such credit.

AURTUS COMMENTS

• In the erstwhile regime, the Supreme Court in Chandrapur Magnet³ has held that credit reversed amounts to non-availment of credit. The Supreme Court in Ind-swift⁴ while evaluating the provisions of Rule 14 of the CENVAT Credit Rules, 2004 (pre- 2012), held that the word 'or' appearing between the words taken or utilized could not be read as 'and', interest and penalty thus, could have been imposed on either of events. However, the Karnataka High Court in Bill Forge⁵ while distinguishing the Supreme court ruling in Ind-swift [supra] held that once the credit was reversed it was as if that the credit was not available and interest would arise only when the assessee had taken the credit and had not paid the duty which is legally due to the Government resulting in a loss to that extent. However, subsequent to this, there have been multiple contrary decisions on the issue and matter is now currently pending before the Hon'ble Supreme Court⁶ . In 2012 the Rule 14 of the CCR was amended to impose interest on the wrong availment of input tax credit only where it was utilized. However, Rule 15 regarding penalties for 'wrong availment' or 'wrong utilization' of CENVAT Credit remained unamended, allowing penalties even without credit utilization.
• A similar issue has surfaced in the GST era. While interest is sought to be imposed only the input tax credit wrongfully taken and utilized, penalties can be imposed for credit that is wrongly availed or utilized under Section 73 and 74 of the CGST Act, despite the absence of loss to government revenue. The Hon'ble High Court has rightly set aside such penalties on grounds that though proceedings can be initiated under section 73 and 74, penalty can be imposed only where such credit was ultimately utilized for payment of GST. The Patna High Court in Commercial Engineering⁷, also has held that mere reflection of the input tax credit in the credit ledger would not amount to availment and only such availment leading to reduction in tax liability could be said to attract any penal consequences. Thus, the view that no penalty can be imposed under section 73 and 74 of the CGST Act, unless the availment and utilization results in short payment or non-payment of taxes should hold goods under the GST regime. However, as history suggests, the use of the word "or" in section 73 and 74 of the CGST Act, especially where language for imposition of interest was specifically amended to substitute the word 'or' to 'and', could continue to create dispute between the taxpayers and the GST authorities.
• Additionally, the imposition of a general penalty under Section 122 of the CGST Act, when no revenue loss has occurred, also does not find support as, language used in sub-section (2) of section 122 is linked to and is similar to that in section 73 and 74 and in our humble view a similar interpretation should be extended to these provisions as well.

Footnotes

1 M/s Greenstar Fertilizers Limited

2 2022-VIL-72-MAD

3 1996 (81) ELT 3 (SC)

4 2011 (265) ELT (SC)

5 2012 (26) STR 204 (Kar)

6 Special Leave to Appeal (C) CC No. 7097 of 2016

7 2019 (7) TMI 1452 (Patna)

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