2021 (8) TMI 405 - HC - GST

Court rules in favor of petitioner partnership firm over wrongful tax credit issue, emphasizing due process protection.

M/s. Deem Distributors Private Ltd Versus Union of India

The Court ruled in favor of the petitioner, a partnership firm accused of wrongfully availing input tax credit. The Court found that the respondents' ... Reversal of Input Tax Credit - fictitious suppliers/firms - fake invoices - demand to remit the amount availed as input tax credit at the stage of summons itself without following due procedure under Section 74 of the CGST Act, 2017 - HELD THAT:- A reading of various provision of section 74 indicates that a notice in sub-Section (1) of Section 74 of the Act may be issued by the proper officer if he is of the opinion that the input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts, to the person who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under Section 50 and a penalty equivalent to the tax specified in the notice. Sub-Section (5) of Section 74 of the Act, however, enables the person chargeable with tax to, before service of notice under sub-Section (1) of Section 74, pay the tax along with interest payable under Section 50 and a penalty of 15% of such tax on the basis of his own ascertainment of such tax or the tax ascertained by the proper officer and inform the proper officer in writing of such payment. Sub-Section (9) of Section 74 of the Act enables the proper officer to determine the amount of tax, interest and penalty due from such person and issue an order, if the contents of the notice are disputed. Sub-Section (5) of Section 74 of the Act gives a choice to the tax payer to make any payment, if he is so chooses, but it does not confer any power on the respondents to make a demand as if there has been a determination of liability of the Assessee and demand tax along with interest and penalty - Before ascertainment of liability, the 4th respondent could not have issued the letter dt.25.04.2019 to the petitioner asking him immediately reverse the input tax credit of ₹ 1,52,35,820/- allegedly availed. No tax demand can be issued or raised when investigation is still in progress. The respondents cannot be allowed to put the cart before the horse and collect any tax, interest or penalty before they determine, in an enquiry, after putting the petitioner/assessee of notice - the respondents are restrained from coercing the petitioner to make any payment without issuing notice under Section 74(1) of the Act and following the procedure therein; and they are directed to refund ₹ 35,00,000/- already paid by petitioner with interest @ 7% p.a from the date of payment till date of refund within four (04) weeks from the date of receipt of a copy of this order. Petition allowed. Issues:1. Alleged wrongful availing of input tax credit by the petitioner.2. Demand for payment without following due procedure under Section 74 of the CGST Act, 2017.3. Coercive actions by the respondents before completion of investigation.4. Legal validity of the demands raised by the respondents.5. Jurisdiction and powers of the respondents to issue notices and demands during ongoing investigations.Analysis:1. The petitioner, a partnership firm registered under various GST Acts, faced allegations of availing input tax credit fraudulently based on invoices from fictitious suppliers. The respondents demanded the reversal of a specific amount of credit without completing the investigation or issuing a formal notice under Section 74 of the Act.2. The petitioner contended that the respondents' actions were premature and violated due process under the law. They argued that demands made without a proper enquiry and notice were coercive and unconstitutional, citing Art.14 and 300-A of the Constitution of India.3. The Court examined the provisions of Section 74 of the Act, which outline the procedure for determining tax liabilities related to fraudulent activities. The Court noted that while the Act allows taxpayers to make payments voluntarily before a formal notice, it does not empower the respondents to demand payments without completing the necessary procedures.4. The respondents, in their counter-affidavit, admitted that investigations against the petitioner were ongoing and no final determination of liability had been made. Despite this, demands for tax payments were made based on incomplete information and intelligence reports, bypassing the statutory requirements of issuing notices and conducting proper enquiries.5. The Court held that demands and coercive actions by the respondents were arbitrary and lacked legal basis. They ruled in favor of the petitioner, restraining the respondents from collecting payments without following the prescribed procedures. The Court directed the refund of a portion of the amount already paid by the petitioner and allowed the investigation to proceed in accordance with the law.6. Ultimately, the Court's decision emphasized the importance of adhering to legal procedures and protecting the rights of taxpayers during investigations and enforcement actions. The judgment clarified the limitations on the powers of tax authorities and highlighted the significance of due process in tax matters to ensure fairness and justice for all parties involved.