Madras High Court Rules on Penalty for Unutilized GST Input Tax Credit

Introduction:

In the case of Greenstar Fertilizers Limited v. The Joint Commissioner (Appeals), the Hon’ble Madras High Court addressed the issue of whether penalty can be levied under Section 74 of the CGST Act when wrongly availed Input Tax Credit (ITC) remains unutilized and is reversed subsequent to a show cause notice.

Facts of the Case:

Greenstar Fertilizers Ltd., formerly registered under the Central Excise Act, transitioned various credits via Form TRAN-1 to the GST regime. Some of this transitioned credit was found to be ineligible under GST rules. Importantly, the petitioner did not utilize this ineligible credit for tax payments and it remained in their E-credit ledger.

The Revenue department issued a show cause notice which led to an adjudication confirming demands for tax, interest, and penalty on the ineligible credit in the E-credit ledger. The first appellate authority modified the order, upholding the penalty under Section 74 while quashing the demand for tax and interest.

Issue:

Whether penalty under Section 74 of the CGST Act can be imposed on wrongly availed but unutilized ITC lying in the E-credit ledger?

Held:

The Hon’ble Madras High Court held that penalty cannot be imposed under Section 74 where the wrongly availed ITC has not been utilized and has subsequently been reversed upon issuance of the show cause notice. The Court emphasized that Section 74 pertains to situations involving fraud, wilful misstatement, or suppression of facts related to availing or utilizing ITC. Since the ITC in question was neither utilized nor involved any fraudulent intent, the imposition of penalty was deemed unjustified. The Court referred to precedent and concluded by imposing a nominal penalty of Rs. 10,000, closing the petition in favor of the petitioner.