Excess Input Tax Credit and interest/penalty liability where wrongly entered ITC was not utilized and later reversed

Issue concerns liability for interest and equal penalty for alleged utilisation of excess input tax credit (ITC) recorded in the electronic credit ledger. The reasoning applies the principle that mere wrongful reflection of ITC in the ledger does not attract interest or penalty unless such ITC or part thereof is actually utilised; if excess ITC is reversed prior to utilisation, recovery of interest and penalty is not tenable. Reliance was placed on prior decisions addressing wrongful availing and reversal of credit. Consequence: demand for interest and penalty on the reversed excess ITC was set aside and the appeal allowed.

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Issues Involved:
1. Jurisdiction of the proper officer.
2. Utilization of excess Input Tax Credit (ITC).
3. Imposition of interest and penalty on excess ITC.

Summary:

Jurisdiction of the Proper Officer:
The petitioner initially challenged the show cause notice on the grounds that it was issued without jurisdiction as the respondent No. 5 was not a proper officer. However, this plea was not pressed during the arguments.

Utilization of Excess Input Tax Credit (ITC):
The petitioner, a proprietorship trading concern, inadvertently claimed excess ITC of Rs. 12,65,20,827/- in August 2017 instead of Rs. 1,40,57,836/-. The petitioner reversed the excess ITC in July 2018. The respondents contended that the petitioner had utilized the excess ITC and thus was liable for interest and penalty. However, the court found that the petitioner had sufficient ITC balance and did not utilize the excess ITC. The excess ITC was reversed before utilization, negating the claim of wrongful utilization.

Imposition of Interest and Penalty:
The respondent No. 3 confirmed the demand for interest but dropped the proposal for penalty. The respondent No. 4, on appeal, imposed interest and penalty on the petitioner. The petitioner argued that no interest or penalty was payable as the excess ITC was not utilized. The court referred to Section 50 of the CGST Act and relevant case laws, concluding that mere wrongful reflection of ITC in the electronic ledger does not warrant penal proceedings if the ITC is reversed before utilization. The court held that the demand for interest and penalty was untenable as the excess ITC was not utilized and was reversed prior to utilization.

Conclusion:
The court allowed the appeal, setting aside the impugned order dated 29.04.2022, and held that the petitioner was not liable to pay interest or penalty on the excess ITC wrongly entered in its electronic credit ledger.

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