Interest on belated tax limited to cash component where ineligible ITC was reversed and declared; matter remitted for fresh adjudication.

The note addresses liability for interest on belated GST tax and penalty for ineligible input tax credit where the taxpayer reversed the credit and filed a DRC-03A declaration; it directs that interest assessment must account for the compensatory character of interest and the statutory amendment limiting interest exposure to the cash portion where applicable, and that penalty exposure requires fresh factual and legal determination. The matter is remitted for fresh adjudication on merits, permitting the taxpayer to file a reply with documents and requiring the adjudicating authority to consider the reversal, the declaration, relevant precedents and the statutory amendment before passing a reasoned order.

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Issues: (i) Whether penalty under Section 74 and interest under Section 50 of the respective GST enactments are payable where ineligible input tax credit was purportedly reversed and related payments/declarations were made, and (ii) Whether the matter requires fresh adjudication in light of the reversal and statutory amendment to Section 50(3).

Issue (i): Whether penalty under Section 74 and interest under Section 50 are payable given the petitioner's reversal of the ineligible input tax credit and the filings made pursuant to Circular No.12/2024.

Analysis: The dispute arises from input tax credit claimed and subsequently sought to be reversed; records show reversal steps and a declaration in a DRC-03A form. Relevant legal context includes the compensatory character of interest on belated tax payment, distinctions between availment and utilisation of input tax credit, and the proviso and amendments limiting interest liability to the cash portion of tax in certain circumstances. The position taken in precedent decisions and the statutory amendment to Section 50(3) (Finance Act, 2022) are material to whether interest and penalty should be imposed after reversal and declarations by the taxpayer. The factual averments and documents are to be examined by the adjudicating authority on merits.

Conclusion: The question of liability to pay penalty under Section 74 and interest under Section 50 is not finally decided and is remitted to the Respondent for fresh adjudication on merits taking into account the reversal, the DRC-03A declaration, relevant judicial decisions, and the statutory amendment to Section 50(3).

Issue (ii): Whether the proceedings should be remitted for fresh consideration and the procedural steps required.

Analysis: The petitioner has been permitted to file a reply with supporting documents treating the impugned order as an addendum; the respondent is required to consider the reply and pass a fresh reasoned order within a specified timeframe. The respondent must take note of the Finance Act, 2022 amendment to Section 50(3) while adjudicating.

Conclusion: The petition is disposed of by remitting the matter to the Respondent to pass fresh orders on merits after the petitioner files a reply within 30 days; the Respondent shall decide the matter expeditiously, within 3 months of receipt of the reply.

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