GST penalty under Sections 27(1) and 27(2) quashed for violating natural justice principles

The Madras HC allowed the petition challenging penalty imposition under GST Act. The court held that imposing penalty under Sections 27(1) and 27(2) violated natural justice principles when the show cause notice was issued under Section 22(2) instead of invoking Sections 27 and 27(4). The respondent failed to establish findings of wrong ITC availment or false bills production. The court emphasized that penalty cannot be imposed automatically and requires proof of criminality with higher evidentiary standards than regular assessment demands. The impugned orders were quashed.

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Issues Involved:
1. Jurisdiction and validity of imposing penalty under Section 27(4) of the Tamil Nadu Value Added Tax Act, 2006.
2. Consideration of reversal of Input Tax Credit (ITC) and related errors.
3. Requirement of show cause notice and adherence to principles of natural justice.

Summary:

1. Jurisdiction and Validity of Penalty under Section 27(4):
The petitioner contended that the imposition of a 300% penalty under Section 27(4) of the Tamil Nadu Value Added Tax Act, 2006 for the assessment year 2012-2013 was without jurisdiction. The amendment to Section 27(4) came into effect on 27.01.2016, and thus, could not be applied retrospectively. The court agreed, stating, "The respondent cannot impose the same for the assessment year 2012-2013, since the amendment is subsequent to the assessment order." The court emphasized that penalties cannot be imposed automatically and require a higher degree of proof, including findings of willful non-disclosure or wrong availment of ITC.

2. Consideration of Reversal of ITC and Related Errors:
The petitioner argued that the reversal of ITC relating to purchase returns was not properly considered, and there were errors apparent on the face of the record, including arithmetical errors. The respondent confirmed the earlier order without appreciating the written submission or providing reasons. The court found that the respondent failed to verify the quantum of ITC reversal and stated, "No other verification was done with regard to quantum of reversal of ITC." The court quashed the impugned orders due to the lack of proper consideration and verification.

3. Requirement of Show Cause Notice and Adherence to Principles of Natural Justice:
The petitioner argued that there was no show cause notice issued under Section 27(4) of the Act, violating principles of natural justice. The court highlighted that a show cause notice is essential before imposing penalties, referencing a previous judgment, "The relevant portions are extracted hereunder... the imposition of penalty under Section 27(3) is automatic, is erroneous in law." The court concluded that the absence of a show cause notice and findings of willful suppression invalidated the penalty imposition.

Conclusion:
The court allowed the writ petitions, quashing the impugned orders dated 31.05.2023, 07.07.2022, and 04.01.2023, emphasizing the need for proper jurisdiction, verification, and adherence to natural justice principles. The court stated, "These Writ Petitions are allowed. The impugned order, dated 31.05.2023 as modified on 07.07.2022 and 04.01.2023 are hereby quashed. No costs. Consequently, connected miscellaneous petitions are closed."

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