General Penalty Under Section 125: Insights from High Court Rulings

Introduction to General Penalty Under Section 125

In the realm of GST, penalties play a significant role in ensuring compliance and deterring non-compliance. Section 125 of the CGST Act, 2017, empowers the GST department to levy general penalties in various cases. However, the imposition of penalties under this section is subject to interpretation and scrutiny by the judiciary, particularly the High Courts.

View of High Courts on Imposition of Penalty

Rathore Building Material – Allahabad High Court

Introduction

In a significant legal ruling dated December 1, 2023, the Hon’ble Allahabad High Court addressed the case of M/s.Rathore Building Material v. Commissioner of State tax [Writ Tax No 136 of 2023]. This case highlights the crucial issue of penalties imposed under the Central Goods and Service Tax Act, 2017 (CGST Act) and the implications of adherence to Show Cause Notices (SCN).

Facts of the Case

M/s. Rathore Building Material, referred to as “the Petitioner,” received a Show Cause Notice (SCN) under Section 46 of the CGST Act from the Commissioner of State Tax (“the Respondent”). The SCN mandated the petitioner to furnish returns within 15 days to withdraw the proceedings initiated against them.

Despite timely compliance by submitting the returns within the stipulated time frame, the Respondent proceeded to impose a penalty under Section 125 of the CGST Act. The Respondent’s Order (“the Impugned Order”) falsely recorded that no reply was furnished by the petitioner.

Consequently, the petitioner filed a writ petition before the Hon’ble Allahabad High Court challenging the imposition of the penalty.

Issue

The central issue before the court was whether it was justified to impose a penalty when the petitioner had diligently complied with the terms of the SCN.

Held

The Hon’ble Allahabad High Court, in the case of Writ Tax No. 136 of 2023, delivered a significant judgment:

The court observed that the Impugned Order, which imposed the penalty based on the false assertion of non-reply by the petitioner, lacked proper application of mind to the facts presented in the case.

Recognizing that the petitioner had complied with the terms of the SCN by furnishing the returns within the prescribed 15 days, the court emphasized that there was no lawful justification for imposing the penalty.

Consequently, the court held that the Impugned Order was contrary to law and passed without due consideration of the facts. Therefore, the Impugned Order was deemed liable to be set aside.

Sonjoli Construction Co. – Rajasthan High Court

Introduction:

In the realm of legal proceedings, the case before Hon’ble Mr. Justice Sandeep Mehta and Hon’ble Mr. Justice Chandra Kumar Songara pertains to a proprietorship firm registered under the GST and its engagement with the Sabka Vikas Legacy Dispute Resolution Scheme, 2019 (SVLDR Scheme). This case delves into the intricacies of voluntary disclosure and the eligibility criteria set forth by the scheme.

Facts of the Case:

The petitioner, a GST-registered proprietorship firm, availed itself of the SVLDR Scheme, opting for voluntary disclosure. Subsequently, the petitioner submitted an application on December 30, 2019, alongside the payment of due service tax totaling Rs. 10,74,702/-. However, their application was met with rejection through an order dated October 12, 2020, issued by the Joint Commissioner, CGST and Excise Duty Commissionerate, Jodhpur.

Issue:

The central contention revolves around the petitioner’s eligibility under the SVLDR Scheme. While the petitioner asserts their entitlement to the scheme benefits, citing the post-cut-off initiation of an audit, the respondent department argues otherwise, contending that the audit initiation prior to December 26, 2019, rendered the petitioner ineligible for the scheme.

Held:

The High Court, in its analysis, emphasized the significance of the cut-off date delineated by the SVLDR Scheme in determining eligibility. Considering legal precedents and the timeline of events, the court held that the initiation of an audit after June 30, 2019, should not preclude the petitioner from availing the scheme benefits. Consequently, the impugned order dated October 12, 2020, was quashed, and the petitioner’s declaration forms were restored for a fresh decision, ensuring equitable treatment and access to scheme benefits.

Atlantic Care Chemicals Pvt. Ltd. – Kerala High Court

Introduction:

In the realm of legal disputes concerning taxation under the Central Goods and Service Tax Act, the case of Dinesh Kumar Singh, J. W.P.(C) No.28372 of 2023, dated September 7, 2023, sheds light on a crucial matter involving penalties imposed on a petitioner. This judgment addresses the complexities surrounding the classification and taxation of hand sanitizers, highlighting the significance of legal precedents and fair adjudication.

Facts of the Case:

During the assessment period spanning from April 2020 to June 2021, the petitioner, engaged in the manufacturing of hand sanitizers, categorized their product under the Tariff heading 30049088 of HSN. The petitioner declared tax liability at a rate of 12%, applicable to medicaments, and duly paid taxes in accordance with the Goods and Service Tax Act. Initially, the returns filed by the petitioner were accepted by the jurisdictional CGST authority. However, on July 5, 2022, the first respondent initiated action under Section 74(1) of the GST Act, issuing a show cause notice to the petitioner.

Subsequently, an order in original dated July 24, 2023, was passed, reclassifying hand sanitizers as “alcohol-based” under HSN 3808, subjecting them to a GST rate of 18%. The petitioner complied with the assessed amount and interest but contested the penalty proceedings initiated by the first respondent.

Issue:

The primary issue at hand revolves around the imposition of penalties on the petitioner for an alleged offense under Section 74(9) read with Section 122(2)(b), 122(1)(i), and 125 of the Central Goods and Service Tax Act. The crux of the matter lies in the classification of hand sanitizers and the subsequent taxation rate applied.

Held:

Upon careful consideration of the facts and legal arguments presented, the Hon’ble Judge, Dinesh Kumar Singh, held that the matter warrants remand to the first respondent for a fresh adjudication. Emphasizing the principle laid down in the case of Chakkiath Brothers v. Assistant Commissioner, wherein it was established that penalty proceedings cannot be initiated solely on the basis of a dispute in classification, the judge emphasized the need for a thorough review of the classification issue. Consequently, the impugned order imposing penalties was set aside, and the case was remanded back to the first respondent for reconsideration in light of legal precedents.

Tirthamoyee Aluminium Products – Tripura High Court

Introduction:

The case of Tirthamoyee Aluminium Products vs State of Tripura, adjudicated on March 9, 2021, by Hon’ble Chief Justice Mr. Akil Kureshi and Mr. Justice S. G. Chattopadhyay of the High Court of Tripura, Agartala, W.P(C) No.1108/2018, underscores the intricacies surrounding tax demands and penalties under the Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) Acts. This judgment delves into a dispute arising from the transportation of aluminium products, shedding light on legal nuances and procedural irregularities.

Facts of the Case:

Tirthamoyee Aluminium Products, a sole proprietorship represented by Shri Sankar Basak, challenged an order issued by the Inspector of State Tax demanding CGST and SGST, along with penalties, totaling Rs. 4,12,291/-. The petitioner, engaged in the manufacturing of aluminium utensils, procured goods from Hindalco Industries Ltd. for a sum of Rs. 19,46,014/-. The consignment, intended for transport from Howrah to Agartala, encountered a clerical error in the E-way bill, incorrectly indicating the distance as 470 Kms instead of 1470 Kms.

Issue:

The central issue pertains to the validity of the tax demand and penalties imposed by the Inspector of State Tax, considering the clerical error in the E-way bill. The petitioner contests the imposition of penalties, citing procedural irregularities and the minor nature of the error.

Held:

Upon thorough examination of the facts and legal provisions, the Hon’ble Court ruled in favor of the petitioner, setting aside the impugned order dated November 5, 2018. The Court emphasized the statutory provisions and circulars issued by the Central Board of Indirect Taxes and Customs, highlighting the treatment of minor discrepancies in E-way bills. Given the clerical nature of the error and the absence of major lapses in documentation, the Court deemed the imposition of penalties unwarranted. Consequently, the petition was disposed of, and the impugned order was overturned.

Analysis and Interpretation of High Court Decisions

These diverse rulings by different High Courts underscore the need for a nuanced understanding of the law and its application. While penalties are essential for enforcing compliance, courts have consistently emphasized the importance of fairness and proportionality in penalty imposition.

Implications and Solutions

Businesses navigating the complexities of GST regulations must stay informed about judicial interpretations and rulings. Proactive compliance measures, timely responses to notices, and meticulous record-keeping can help mitigate the risk of penalties. Moreover, seeking legal counsel and understanding the specifics of each case can provide clarity and guidance in penalty-related matters.

Conclusion

In conclusion, the interpretation of Section 125 by various High Courts highlights the dynamic nature of GST law and the importance of judicial scrutiny in penalty imposition. By understanding the nuances of court decisions and adopting proactive compliance strategies, businesses can navigate the regulatory landscape with confidence.