ENHANCED PENALTY UNSUSTAINABLE ONCE THE PRINCIPAL DEMAND WAS SET ASIDE

In Santu Das Versus Assistant Commissioner of CGST & C. EX, Chandannagore Division & Ors. - 2026 (7) TMI 906 - CALCUTTA HIGH COURT , a show cause notice, dated 06.07.2021 was issued to the writ petitioner by the Department under Section 73(1) of the Central Goods and Services Tax Act, 2017 (‘Act’ for short). The show cause notice pertains to the irregular availment of input tax creditor and wrongful utilisation of the input tax credit. The show cause notice alleged that the petitioner had irregularly availed the input tax credit to the tune of Rs.39.49 lakhs (Rs.16.74 lakhs in CGST and Rs.16.74 lakhs in SGST) for the tax period between November 2018 to March 2019 beyond the due date of availing input tax credit for the financial year 2018-19 and utilized the same for the payment of taxes on outward supply. The show cause notice further alleged that the petitioner availed excess credit of Rs.4.05 lakhs as shown in Annual Return for the period 2017-18 and utilised the same irregularly. The show cause notice further alleged the petitioner has short paid the tax Rs.52,208/- as it was shown excess clearance to the tune of Rs.2,90,042/- in terms of GSTR-1 for the month of August, 2017 in comparison to GSTR-3B for the same period.  Thus 3 issues were raised against the petitioner in the said show cause notice.

The petitioner filed a reply to the said show cause notice. The Adjudicating Authority that the petitioner has defaulted in all the 3 issues alleged against him. Therefore, the Adjudicating Authority issued a demand notice for Rs.19.02 lakhs by passing an order under Section 73(9) of the Act. The Adjudicating Authority also imposed a penalty of Rs. 1 lakh under Section 73(1) read with Section 73(9) of the Act. The petitioner, being aggrieved by the order of the Adjudicating Authority, filed an appeal before the First Appellate Authority challenging the impugned order. The Department also filed an appeal before the Appellate Authority for the enhancement of penalty.

The First Appellate Authority, after hearing the parties, rejected the appeal filed by the petitioner on 22.03.2023. However, the First Appellate Authority allowed the appeal filed by the Department on the ground that the Adjudicating Authority had completed ignored the provisions of Section 73(9) of the Act which provides for the levy of mandatory penalty @ 10% of the tax or Rs.10000/- whichever is higher. On the order of the First Appellate Authority a demand was issued to the petitioner in Form GST-APL 04.

 The petitioner submitted the following before the High Court-

• Subsequent to the insertion of Section 16(5) of the Act with effect from 01,07,2017, the very basis of demand raised by the Department in terms of the first issue forming part of the show cause notice dated 06.07.2021 no longer survives.
• In respect of the second issue, the petitioner purchased services from Aircel and payments were made to the said company.
• The Aircel was put up in the insolvency proceedings before the National Company Law Tribunal the Aircel did not upload the payment particulars on the GST portal.
• Since the tax liability was paid entirely by the petitioner, the petitioner was not responsible for non uploading of the paid vouchers on the GST Portal.
• In respect of the third issue the entire tax alleged as short payment has been made by the petitioner on 31.01.2020. Therefore, the demand of the Department no longer survives.
• The penalty imposed by the Adjudicating Authority needed to be revisited and reconsidered.

In view of the above, the petitioner prayed that the matter may be remanded back on the above said score.

The Department submitted the following before the High Court-

• Unless the Aircel filed the returns and make tax payments, the petitioner’s tax liability would not vanish.
• In respect of the short payment of tax, since it is a factual issue, the High Court cannot be entered into the same.

The High Court heard the submissions of both the parties. The High Court also analysed the show cause notice.

In respect of the first issue, the High Court observed that after the insertion of Section 16(5), the petitioner is eligible to avail the benefit of such provision since the petitioner filed the returns for the tax period of 2018 – 19 before 30.11.2021. Therefore, the High Court quashed the demand raised by the department to the tune of Rs.33.50 lakhs.

In regard to the short payment, the High Court agreed with the contentions of the Department since the said matter is a factual dispute, the same could not be considered by the High Court and therefore, the High Court remanded the matter for this matter to the Adjudicating Authority for its re-consideration.

In regard to mismatch of input tax credit, the High Court observed that the said matter is lying with the Supreme Court, the High Court cannot decide the said issue in these circumstances.

In respect of the quantum of penalty imposed the High Court observed that the quantum of penalty is dependent upon the demand raised. The findings of the Appellate Authority enhancing the penalty was quashed by the High Court. The High Court also remanded this matter back to the Adjudicating Authority for re-adjudication.