2025 (7) TMI 396 - HC - GST

HC reverses penalty deletion for ITC mismatch, remands case for fresh consideration under updated circular procedures

The State of Tamil Nadu Represented by the Joint Commissioner (CT), Salem Division, Salem. Versus Tvl. Sri. Amman Cars India Pvt. Ltd.

The HC reversed the Tribunal's deletion of penalty in a case involving ITC mismatch between assessee and selling dealer returns. The assessing authority ... Reversal of Input Tax Credit (ITC) arising from the mismatch between the returns filed by the assessee and the selling dealer - Deletion of penalty - failure to take into account the relevant - taking into account the factors that are wholly irrelevant in deciding whether penalty is warranted in terms of Section 27(3) of the TNVAT Act, 2006 - suppression in non-disclosing the turnover or not - escapement of turnover - wilful nondisclosure of assessable turnover by the dealer - best judgment made by making equal time addition towards probable suppression/omission - HELD THAT:- The Tribunal has proceeded on the basis of a Circular issued by the Commissioner of Commercial Taxes on 08.04.2014. In fact, a subsequent Circular has been issued by the Commissioner of Commercial Taxes pursuant to a decision of this Court in JKM Graphics Solutions Private Limited, Chennai V. Commercial Tax Officer, Vepery assessment Circle [2017 (3) TMI 536 - MADRAS HIGH COURT]. Therein, this Court had suggested that a mechanism be set up for matching the returns filed by the assessee’s and the selling/purchasing dealers in order to ensure integrity of the claim of ITC - Pursuant to that decision, the Special Commissioner has issued a Circular bearing No.5/2021 dated 24.02.2021. It is this Circular that holds the field now and the procedure set out therein is being followed by the authorities as well the assessee’s to determine the proper quantum of ITC. In the present case, the orders of assessment are dated 11.11.2014 and the order of the first appellate authority is dated 16.07.2015. Thus, neither of the lower authorities had had the benefit of either the decision of this Court in JKM Graphics or Circular dated 24.02.2021. It is only the Tribunal that could, and ought to have noted the Circular. There is some merit in the submission of the State made before the Tribunal, albeit rejected, that the matter should be remanded to the file of the assessing authority for fresh consideration in line with Circular dated 24.02.2021 - the question of law admitted for resolution is answered in favour of the State. The core legal questions considered by the Court revolve around the validity of the Tribunal's order deleting penalty under Section 27(3) of the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act) for the assessment periods 2012-13 and 2013-14. Specifically, the issues include whether the Tribunal erred in deleting the penalty despite alleged suppression of turnover, the applicability of penalty provisions where tax was paid before reassessment, the relevance of willful nondisclosure, and the procedural correctness concerning the reversal of Input Tax Credit (ITC) in light of subsequent circulars and judicial decisions.Regarding the penalty under Section 27(3) of the TNVAT Act, the Tribunal's deletion of penalty was challenged on multiple grounds. The State contended that the Tribunal failed to consider relevant factors and instead relied on irrelevant considerations in deciding the penalty's applicability. The Tribunal affirmed the first Appellate Authority's findings that penalty could not be levied where tax was paid along with the return, even if there was suppression or nondisclosure of turnover. The State argued that the penalty provision is attracted if there is escapement of turnover due to willful nondisclosure, regardless of payment of tax before reassessment.The Court analyzed the legal framework under Section 27(3) of the TNVAT Act, which mandates penalty upon satisfaction that turnover has escaped assessment due to willful nondisclosure by the dealer. The Court emphasized that the provision's language does not exempt penalty merely because the tax was paid before reassessment. Instead, the Assessing Officer is required to enquire into the willfulness of nondisclosure and, if established, levy penalty according to the prescribed slabs. The Tribunal's reasoning that payment of tax before reassessment negates penalty was found contrary to the express statutory provision.In examining the facts, the Court noted that the suppressed turnover was detected during inspection, and the Assessing Officer made a best judgment assessment by adding equal time periods to estimate probable suppression. This finding supports the conclusion that there was willful nondisclosure. The Tribunal's failure to appreciate this fact and its consequent deletion of penalty was viewed as erroneous. The Court held that payment of tax before reassessment does not absolve the dealer from penalty liability under Section 27(3).On the question of whether the Tribunal erred in ignoring the statutory requirement to levy penalty upon willful nondisclosure, the Court underscored that the statutory scheme is clear and unambiguous. The penalty provision is triggered by escapement of turnover due to willful nondisclosure, and the quantum of penalty is governed by the prescribed slabs. The Tribunal's approach of considering payment of tax as a mitigating factor was rejected as inconsistent with the statutory mandate.Addressing the procedural issue concerning reversal of ITC, the Court considered the impact of Circular No.5/2021 issued by the Commissioner of Commercial Taxes, which postdates the assessment and first appellate orders. The circular was issued pursuant to this Court's earlier decision recommending a mechanism to match returns filed by dealers to ensure ITC claims' integrity. The Tribunal had relied on an earlier circular dated 08.04.2014, which was superseded by the 2021 circular.The Court observed that neither the Assessing Officer nor the first Appellate Authority had the benefit of the 2021 circular or the relevant judicial decision at the time of their orders. The Tribunal, however, ought to have applied the latest circular in its consideration. The Court found merit in the State's submission that the matter requires remand for fresh consideration by the Assessing Authority in line with Circular No.5/2021 dated 24.02.2021.Consequently, the Court directed the Assessing Authority to hear the assessee afresh, consider all relevant materials, and pass orders de novo in accordance with the 2021 circular within a stipulated timeframe. The assessee was directed to appear without awaiting further notice and produce all necessary documents to support the ITC claim. The Assessing Authority was also mandated to furnish particulars to enable proper representation by the assessee.The Court's final determinations are as follows: the deletion of penalty by the Tribunal under Section 27(3) of the TNVAT Act was erroneous as it failed to apply the statutory provisions correctly, particularly ignoring willful nondisclosure and escapement of turnover as triggers for penalty irrespective of prior payment of tax. The matter relating to reversal of ITC was remanded for fresh adjudication in conformity with the latest circular and judicial guidance. Both tax cases were allowed accordingly, with no costs awarded.In essence, the Court reaffirmed the principle that penalty under Section 27(3) is mandatory upon willful nondisclosure causing escapement of turnover, and payment of tax before reassessment does not preclude penalty. It also established that procedural fairness and adherence to updated circulars and judicial precedents are essential in ITC claim adjudication, warranting remand where earlier orders predate such developments.