Input tax credit reversal and natural justice led to setting aside of penalty and interest for fresh reconsideration.

Penalty and interest could not be sustained where input tax credit had been reversed before utilisation and was not shown to have been availed in a manner attracting penal consequences. The Court noted that Section 74 of the CGST Act applies where credit is availed or utilised by reason of fraud, wilful misstatement, or suppression, and on the facts recorded the impugned penal order was not sustainable in its present form. The absence of a hearing before disposal also supported fresh consideration. The penalty and interest order was set aside, and the matter was directed to be reconsidered on merits after affording the petitioner an opportunity of hearing.

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Issues: Whether penalty and interest could be sustained where input tax credit was reversed and remained unutilised, and whether the matter required reconsideration after giving the petitioner an opportunity of hearing.

Analysis: The dispute turned on the effect of reversal of input tax credit before any utilisation. The Court followed its earlier view that where ITC was neither availed in a manner warranting penal consequence nor utilised, imposition of penalty was not justified. It also noted that Section 74 of the Central Goods and Services Tax Act, 2017 is attracted where credit is availed or utilised by reason of fraud, wilful misstatement, or suppression, and the cited facts did not call for sustaining the impugned penal order in its present form. The rejection of the appeal on delay and the absence of a hearing before disposal of the matter also supported fresh consideration.

Conclusion: The penalty and interest order was set aside and the matter was directed to be reconsidered afresh on merits after affording an opportunity of hearing to the petitioner.

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