2025 (11) TMI 580 - HC - GST

Penalty of Rs.6,05,17,933 set aside as illegal; Sections 74, 75 applied; Section 122 invocation improper; matter remitted

M/s. Metal N Strips Versus Joint Commissioner Of Commercial Tax (Appeals - 3) Bengaluru, Assistant Commissioner Of Commercial Tax (Audit) - 3. 1 Bengaluru.

HC set aside the portions of the impugned orders imposing and confirming a penalty of Rs.6,05,17,933/- as illegal, arbitrary and contrary to Sections 74 ... Increase in the quantum of penalty - penalty imposed in excess of tax demanded - petitioner is ready to pay the tax and interest as demanded in the impugned order - HELD THAT:- A perusal of the impugned orders passed by the respondents will indicate that the following provisions have not been considered or appreciated while passing the impugned orders which are clearly illegal, arbitrary and contrary to the provisions contained in Sections 74 and 75 of the KGST Act and are without jurisdiction or authority of law and the same deserve to be set aside, insofar as they relate to imposing and confirming a penalty of Rs. 6,05,17,933/- and the matter remitted back to the 2nd respondent for reconsideration afresh in accordance with law to the limited / restricted extent of aforesaid penalty payable by the petitioner. A perusal of the impugned orders will indicate that the statutory provisions and underlying principles have not been considered or appreciated by the respondents, who have illegally and arbitrarily not only demanded higher penalty from the petitioner in excess of what was demanded in the show cause notice but also demanded penalty in excess of the tax which was confirmed by the respondents themselves in the impugned orders and the invocation of Section 122 of the KGST / CGST Act in the impugned orders also being illegal and arbitrary and contrary to the aforesaid provisions warranting interference by this Court in the present petition. The impugned orders passed by the respondents at Annexures - A and B deserve to be set aside and the matter be remitted back to the 2ndrespondent for reconsideration afresh in accordance with law - Petition allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether an adjudicating authority, in proceedings under Section 74 of the Karnataka GST Act, may impose a penalty in excess of the tax demanded in the show cause notice or in excess of the tax ultimately determined in the adjudication order. 2. Whether an adjudication order under Section 74(9) can confirm a demand (tax/penalty) on grounds other than those specified in the show cause notice issued under Section 74(1) and whether the penalty confirmed may exceed the penalty originally proposed in the show cause notice. 3. Whether, where a penalty is imposed under Section 74, penalty for the same act or omission can thereafter be imposed under any other provision of the KGST Act (notably provisions in Sections 122-128). 4. Whether failure of the adjudicating authority to consider and apply Sections 74 and 75 (including sub-sections (1), (9) of Section 74 and sub-sections (7), (13) of Section 75) renders the penalty portion of the order illegal, arbitrary and liable to be set aside and remitted for fresh consideration. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether penalty under Section 74 may exceed the tax demanded or determined Legal framework: Section 74(1) prescribes that where tax is not paid or short paid by reason of fraud or willful misstatement/suppression, the proper officer shall issue notice requiring payment of tax, interest under Section 50 and 'a penalty equivalent to the tax specified in the notice.' Section 74(9) requires the proper officer, after considering representations, to determine the amount of tax, interest and penalty due and issue an order. Precedent treatment: The judgment does not rely on or cite any prior authority; the Court's analysis is based on statutory text and construction. Interpretation and reasoning: The Court reads Section 74(1) as plainly limiting the penalty to a maximum equivalent to the tax specified in the notice. Section 74(9) is interpreted to require the adjudicating authority to determine penalty within that statutory ceiling after considering the representation. The Court finds that an adjudication order increasing penalty beyond the tax specified in the show cause notice and beyond the tax confirmed in the order contravenes the statutory limit. Ratio vs. Obiter: Ratio - penalty under Section 74 cannot exceed the tax amount specified in the show cause notice and may not be increased in the adjudication order beyond that statutory maximum. Conclusion: The penalty component imposed in excess of the tax violates Section 74(1) and Section 74(9) and is liable to be set aside to the limited extent it exceeds the statutory limit. Issue 2 - Whether an adjudication order can confirm demands on grounds other than those specified in the show cause notice and whether it may increase penalty beyond the SCN Legal framework: Section 75(7) provides that the amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and 'no demand shall be confirmed on the grounds other than the grounds specified in the notice.' Section 74(9) (quoted above) requires consideration of the representation prior to determination. Precedent treatment: No precedent cited; statutory interpretation controls. Interpretation and reasoning: The Court holds that Section 75(7) creates an embargo: the adjudication order cannot confirm a demand greater than that specified in the SCN nor can it rest the demand on grounds not disclosed in the SCN. From this follows that increasing the penalty in the adjudication order beyond the penalty proposed in the SCN, or confirming differences of grounds, is impermissible and procedurally unfair (as it prevents meaningful response under the SCN). Ratio vs. Obiter: Ratio - an adjudication order cannot confirm or increase demands (tax/interest/penalty) beyond amounts and grounds specified in the SCN; any such increase is ultra vires and requires reconsideration. Conclusion: The impugned increase in penalty from the SCN figure is contrary to Section 75(7) and unsustainable; the penalty portion must be set aside and reconsidered consistent with the SCN and statutory limits. Issue 3 - Bar on imposing multiple penalties for the same act or omission under different provisions Legal framework: Section 75(13) provides that where any penalty is imposed under Sections 73 or 74, no penalty for the same act or omission shall be imposed on the same person under any other provision of the Act. Precedent treatment: None cited; Court applies plain meaning. Interpretation and reasoning: The Court interprets Section 75(13) as a bar to double-penalisation under the Act for the same act/omission. It follows that once penalty under Section 74 is imposed for specified acts, the revenue cannot thereafter treat the same acts as grounds for penalty under Sections 122-128. Ratio vs. Obiter: Ratio - Section 75(13) operates as a statutory bar against imposing penalty for the same act under another provision after imposition under Section 74 (or 73). Conclusion: Invoking Section 122 (or other provisions) to justify additional penalty for the same act is contrary to Section 75(13); such double imposition is not permissible. Issue 4 - Effect of failure to consider statutory limits and protections in passing penalty orders; remedy Legal framework: Sections 74(1), 74(9), 75(7), 75(13) together regulate quantum, grounds and exclusivity of penalties in the adjudication process under the KGST Act. Precedent treatment: None relied upon; Court applies a conjoint and harmonious construction of the provisions. Interpretation and reasoning: The Court finds that the impugned orders reduced tax and interest but simultaneously increased the penalty to an amount exceeding both the penalty stated in the SCN and the tax amount itself. The orders failed to appreciate the statutory constraints set out in the cited provisions. Such omission is characterised as illegal and arbitrary. Given the procedural and substantive infirmities, the appropriate relief is limited interference: confirm the admitted tax and interest, set aside the penalty portion, and remit the matter to the adjudicating authority for fresh consideration strictly within statutory bounds and after affording opportunity to be heard. Ratio vs. Obiter: Ratio - failure to apply Sections 74 and 75 when determining penalty renders the penalty portion of the order liable to be set aside; remedy is remand for fresh adjudication on penalty alone, consistent with statutory limits and procedural fairness. Obiter - ancillary observations on conduct of respondents and the need to accept deposited tax/interest are consequential to the principal ruling. Conclusion: The appropriate course is (a) confirmation of the reduced tax and interest which the petitioner is willing to pay; (b) setting aside of the excessive penalty; and (c) remitting the penalty issue to the proper officer for fresh adjudication limited to the penalty, observing the ceilings and grounds specified in the SCN and affording adequate opportunity to the taxpayer. Liberty to place materials before the authority is preserved.