2025 (11) TMI 235 - HC - GST

Penalty under Section 11AC(1)(c) read with Section 122(2)(b) set aside where no benefit from ineligible ITC

HC allowed the petition, holding that imposition of penalty under Section 11AC(1)(c) read with Section 122(2)(b) of the CGST Act was unjustified. The ... Maintainability of petition - availability of alternate remedy u/s 107 of the respective GST enactments before the appellate authority - imposition of penalty under Section 11AC(1)(c) read with Section 122(2)(b) of the CGST Act, 2017 - HELD THAT:- While dealing with an identical case in Greenstar Fertilizers Limited Vs. Joint Commissioner, GST and Central Excise (Appeal), Madurai [2024 (6) TMI 667 - MADRAS HIGH COURT], this Court had considered several decisions of other Courts and concluded that 'considering the fact that the petitioner has availed input tax credit, which was not eligible to be availed, but could have resulted in wrong utilization of input tax credit, a token penalty of Rs. 10,000/- is imposed on the petitioner. The observation of the first respondent by placing reliance on the decisions of the Hon'ble Supreme Court referred to supra, is also not relevant as Section 74 of the CGST Act deals with a situation where the credit is availed or utilized by reason of fraud or any willful misstatement or suppression of facts.' A reading of the above decision in the context of the case indicates that although the Petitioner had delayed in reversing the proportionate input tax credit availed on the obsolete/slow moving inputs, the Petitioner did not get any advantage for the same and had reversed the proportionate credit based in their entries made in the trial balance on 23.10.2019. There is no justification in imposing penalty under Section 11AC(1)(c) of the Central Excise Act, 1944 read with Section 122(2)(b) of the CGST Act, 2017 - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the writ petition is maintainable notwithstanding the existence of an alternate remedy under Section 107 of the GST enactments. 2. Whether imposition of penalty under Section 11AC(1)(c) of the Central Excise Act, 1944 read with Section 122(2)(b) of the CGST Act, 2017 is justified where proportionate input tax credit in respect of obsolete/slow-moving inputs was reversed belatedly but no wrongful advantage or utilization resulted. 3. Whether interest demanded under Section 11AA of the Central Excise Act, 1944 read with Section 50(3) of the CGST Act, 2017 is exigible where the taxpayer maintained sufficient balance in the credit ledger until reversal/payment of attributable credit. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of Writ Petition despite alternate remedy under Section 107 Legal framework: Section 107 of the GST enactments provides an appellate remedy against orders; ordinarily availability of an efficacious alternative remedy weighs against writ jurisdiction. Precedent Treatment: The Court considered prior decisions where writ jurisdiction was exercised in tax matters when alternate remedy was inadequate or where substantial questions of law or grave injustice would otherwise occur. Interpretation and reasoning: The Court treated the existence of an appellate remedy as a factor but did not treat it as an absolute bar in circumstances where the challenge concerned legitimacy of penalty imposition in light of contemporaneous factual matrix and judicial authorities adopting a token-penalty approach. The Court implicitly recognized that when the impugned order raises pure questions of law or involves exceptional facts leading to disproportionate punishment, writ remedy may be entertained. Ratio vs. Obiter: Ratio - the availability of Section 107 does not automatically oust writ jurisdiction when exceptional circumstances and legal issues of continuing public or private interest arise; Obiter - none beyond contextual remarks. Conclusion: Writ petition was entertained and decided on merits in the circumstances presented. Issue 2 - Validity of penalty under Section 11AC(1)(c) read with Section 122(2)(b) where reversal of credit was delayed but no wrongful utilization arose Legal framework: Section 11AC(1)(c) of the Central Excise Act (read with Section 122(2)(b) CGST Act) empowers imposition of penalty for wrongful availment of credit; Section 74 (CGST) deals with credit availed by reason of fraud, willful misstatement or suppression. Precedent Treatment: The Court relied on a recent line of decisions in which penalties were disallowed or reduced where taxpayers reversed ineligible credit belatedly and where there was no benefit, wrongful utilization, fraud, or suppression. Those precedents imposed token penalties in analogous factual matrices rather than full statutory penalties aimed at fraud. Interpretation and reasoning: The Court distinguished cases where Section 74 would apply (fraudulent or willful misstatement/suppression) from the present facts where entries in the trial balance showed reversal and the taxpayer did not derive any quantifiable advantage. Considering the purpose of penalty provisions-to punish culpable conduct and deter wrongful gain-the Court found that full penalty was unjustified where there was no wrongful utilization or advantage. The Court viewed the imposition of full penalty as disproportionate in the absence of mens rea or benefit to the taxpayer and followed authorities that imposed token penalties instead of the full statutory amount in materially similar circumstances. Ratio vs. Obiter: Ratio - where ineligible input tax credit is reversed belatedly but no wrongful utilization, advantage, fraud, or suppression is shown, imposition of full penalty under the cited provisions is unjustified and a token penalty may be appropriate; Obiter - the precise quantum of token penalty is discretionary and fact-dependent. Conclusion: Penalty under Section 11AC(1)(c) read with Section 122(2)(b) was not justified on the facts; the writ petition was allowed to set aside the penalty (consistent with precedents that favor token penalty/remand). The matter was remitted in line with similar decisions where appropriate. Issue 3 - Liability for interest under Section 11AA read with Section 50(3) where credit ledger balance was sufficient until reversal/payment Legal framework: Section 11AA of the Central Excise Act and Section 50(3) of the CGST Act permit levy of interest on delayed payment or reversal of credit; Rule 14 and related provisions govern recovery/adjustment where CENVAT/ITC is inapplicable. Precedent Treatment: The impugned order relied upon various court/tribunal authorities addressing recovery of CENVAT/ITC and the circumstance in which interest may be dropped if no practical deprivation or advantage occurred. Interpretation and reasoning: The Respondent concluded, and the Court accepted, that interest demand could be dropped where the taxpayer maintained sufficient credit balance until the attributable CENVAT/ITC was paid/reversed, so there was no period of actual shortfall or benefit from availment. The analysis focused on whether interest was compensatory for use of funds (which requires demonstrable utilization/benefit) and whether ledger balances precluded accrual of interest liability. Ratio vs. Obiter: Ratio - where sufficient input tax credit balance existed until the reversal/payment of attributable credit, interest demand under the cited provisions may properly be dropped; Obiter - application to different factual matrices may vary. Conclusion: Interest demand was rightly dropped on the facts; no interest payable given the maintained credit balance. Cross-references and Interplay 1. Issues 2 and 3 are interlinked: absence of wrongful utilization/advantage (Issue 2) supports rejection of interest (Issue 3) and diminishes justification for full penalty. 2. Precedential approach favoring mitigation (token penalty) where conduct lacks fraud or suppression was applied consistently; reliance on Section 74 jurisprudence was rejected where its requisites were not satisfied. Final Disposition The Court allowed the writ petition: confirmed that interest demand was to be dropped; held that imposition of penalty under the cited provisions is unjustified on the facts; and disposed of connected petitions accordingly. No costs were awarded.