AI Drafter 
TaxTMI 
TaxTMI 
At the outset, I record that the words charging excess amount is used consciously as the readers after completely going through this article may appreciate the fact that the words are inappropriate because we should use little harsh words than this but I do not wish to hurt anyone who may be really unaware of the legal position. It is a real story of one innocent client who started business in February 2018 whose business premises were audited during 2022 and based on the audit observations, huge taxes were paid voluntarily even before issuance of SCN based on such audit observations.
The crux of the issue is a sum of 52,14,828/- was availed as ITC attributable to exempted supplies which was never utilized. Upon learning that as per Section 17(2) it is impermissible, during January 2020 itself, the ineligible ITC was voluntarily reversed through GSTR 3B. It was observed during 2022 by the audit team and based on the audit observations Show Cause Notice was issued on 25/05/2023. To be more precise, as against the departmental requirement of ITC reversal of 61,72,676 a sum of 52,14,828 was reversed during January 2020 and in 2022 (50,89,170 during January 2020 itself before audit and 1,25,658 during 2022 based on audit observation) and the taxpayer is on appeal against the difference amount of 9,64,704 which claimed by revenue over and above 52,14,828/-. The maximum permissible penalty under section 73 (9) is 10% of tax demanded or 10,000/ whichever is higher. Going by the Section 73 (9) the maximum permissible penalty is only 10% on 9,64,704 which the taxpayer disputed during adjudication in November 2023. However, a penalty of 10% on entire 61,72,660 amounting to 6, 17,266 was confirmed as penalty in OIO passed on 03/11/2023.
The best part is that the taxpayer preferred the first appeal and the Additional Commissioner (Appeal) also confirmed the OIO by rejecting the appeal in total. A late fee as demanded in OIO was also paid before filing first appeal and proof was also enclosed. Despite the above, the OIO was confirmed in OIA on 24/04/2025 in a mechanical manner even without noticing that the levied penalty is illegal, impermissible as well as in violation of the GST provisions. Neither the documents were seen properly nor the order was examined properly before rejecting the appeal in total.
There are three issues in total and in all the three issues penalty is levied in OIO dated 03/11/2023 on gross amount including taxes paid prior to issuance of SCN as well as well as ITC reversed voluntarily even before audit. In order to better appreciate the position of law, a reference is invited to Section 73 (SCN was issued under Section 73 in the above referred case) which clearly provides for waiver of penalty on that portion of the taxes which were paid either prior to issuance of SCN or within 30 days of issuance of SCN. This is most important provision which all taxpayers must be aware to stay safe from this type of illegal demands and hence sub section 8 of section 73 is furnished below.
'(8) Where any person chargeable with tax under sub-section (1) or sub-section (3) pays the said tax along with interest payable under section 50 within thirty days of issue of show cause notice, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded'.
In my view, a GST official who is not conversant with Section 73, 74 and 74A and who applies 74 where only 73 is applicable or applies 73 but levies penalty in violation of Section 73 or who applies 73 or 74 for a tax period commencing on or after 01/04/2024 must be identified by the Commissioner or Chief Commissioner and must be relieved from duty for two months for compulsory training on how to pass the adjudication order which legally sustains in further appeals.
There are lakhs of honest taxpayers spread all over India who honestly believe that the GST officials shall raise only genuine demand. The nuances in 73/74/74A are very difficult for a non tax professional to understand and the GST officials, in my view exploit this situation to collect taxes or interest or penalty illegally. Most of the taxpayers pay the demanded amount in full either out of fear of future course of action by GST officials or due to lack of awareness on the extant provisions of law.
I conclude by stating that this is the one case where I come across illegal confirmation of the penalty and it is a live case. In case any GST authority at CBIC is really interested to improve the quality of adjudication proceedings as well as to minimise avoidable litigation, I am more willing to furnish huge data on the behaviours of various GST officials spread all over India.
All taxpayers/ Tax Professionals may kindly check the orders to ensure that the penalty as confirmed in OIO / OIA is in line with 73/74/74A and there is no excess amount being confirmed to save the honest taxpayers.