Applicability of Interest & Penalty on ITC Availed but not utilised

Hon’ble Madras High Court (‘HC’) in the case of M/S. AATHI HOTEL, VERSUS THE ASSISTANT COMMISSIONER (ST) (FAC) , NAGAPATTINAM DISTRICT [2022 (1) TMI 1213 - MADRAS HIGH COURT] “the applicant” has ruled that their would not be any interest liability on transitional credit claimed through TRAN-01 which was not utilized and still available in electronic credit ledger of taxpayer. Captioned ruling has been analyzed in this update.

• The applicant had filed its GST TRAN-01 and claimed SGST credit of Rs.3,86,271/- however the unavailed credit as per VAT returns was only Rs.2,29,850/- and thus excess claim of Rs.1,56,421/- was made.

• For balance credit, applicant submitted invoices and after their verification, that ITC claimed was inadmissible both under TNVAT Act and GST Act.

• Accordingly, department passed assessment order U/s 74 of GST Act raising demand of tax of Rs.3,86,271/-, penalty @ 100% of Rs.3,86,271/- and interest @ 24% of Rs.2,32,651/-.

• The applicant challenged the aforesaid order before Hon’ble High Court under writ jurisdiction.

• That the ITC was never utilized, and entire transitional credit was reversed through monthly GST return of January 2020 and thus question of interest and penalty does not arise.
• That Section 74 of GST Act would only apply to those cases, where there is wrong utilization of credit availed.
• That interest u/s 50(3) will apply only if a person makes undue or excess claim of ITC U/s 42(10) or undue or excess reduction in outward tax liability u/s 43(10).

• That the petitioner was neither entitled to ITC under erstwhile TNVAT Act nor entitled to transition of credit under GST regime and therefore is liable to pay interest and penalty for availing transitional credit wrongly.
• That the attempt of the petitioner to avail credit and transition the same shows that the petitioner’s intention was not bonafide but was to wrongly utilize the ITC.
• That the interest and penalty are consequential in terms of section 74 of GST Act.

• It is evident that the petitioner had wrongly attempted to transition a credit with the hope to use the same against future tax liability. Thus the intention of the petitioner is not bonafide.

• That the taxpayer has not utilised the aforesaid ITC and has reversed the same on receipt of SCN from department.

• Though the proceedings U/s 73(1) or 74(1) can be initiated for mere wrong availment of ITC however the interest and penalty stand attracted only where such credit has been availed and utilised as well.

• Since the taxpayer has wrongly availed ITC which he could have used and thus is liable for token penalty of Rs.10,000/-

Captioned decision of Hon’ble Madras High Court has again upheld that interest and penalties would be attracted only in the event if the ITC availed is utilized and not otherwise. The Judgement of Hon’ble Patna High Court in the case of M/s Commercial Steel Engineering Corporation Versus The State of Bihar, The Joint Commissioner of State Taxes Patliputra Circle, Patna, The Assistant Commissioner of State Taxes Patliputra Circle, Patna - 2019 (7) TMI 1452 - PATNA HIGH COURT has been followed.

Finance Act, 2021 has proposed to amend section 50(3) of GST Act retrospectively from 1^st July 2017 as follows:

Where the input tax credit has been wrongly availed and utilized, the registered person shall pay interest on such input tax credit wrongly availed and utilized, at such rate not exceeding twenty-four per cent. as may be notified by the Government, on the recommendations of the Council, and the interest shall be calculated, in such manner as may be prescribed.

Though this amendment is yet to be notified however the intent of the legislature was clear which was correctly interpreted by Hon’ble High Courts in the aforesaid judgements.

(Author can be reached at [email protected] or [email protected]).