GST Circular Trading: Penalty Equal to Full ITC Passed On, Not Limited to ₹10,000

Tvl.SAM Enterprises Vs Commercial Tax Officer (Madras High Court)

The Madras High Court dismissed writ petitions filed by multiple medical equipment suppliers accused of circular trading and upheld penalties imposed under Sections 122(1)(ii) and 122(1)(vii) of the CGST Act. The Revenue found that 96.6% to 100% of the entities’ transactions were circular trading transactions carried out without actual movement of goods, allegedly to inflate turnover and obtain bank loans. The petitioners argued that penalties under Section 122(1) should be capped at Rs.10,000 and relied on the doctrine of proportionality from labour and service law judgments. The Court rejected these arguments, holding that the expression “whichever is higher” in Section 122(1) leaves no discretion with the Assessing Officer and mandates penalty equivalent to the ineligible ITC availed or passed on. The Court also held that proportionality principles from other legal fields could not override the statutory GST framework. However, considering the large penalty amounts, the Court dispensed with the 10% pre-deposit requirement for appeals and granted liberty to file appeals within 30 days.

Facts:

Multiple entities — namely Tvl. SAM Enterprises, Tvl. New Life Healthcare Products, Tvl. Infix Global Healthcare LLP, Tvl. M.S. Global Health Care, Tvl. Sri Sana Enterprises, and Tvl. Q-Tech Surgical Products — all operating in the medical equipment supply business in Coimbatore, were subjected to assessment orders in Form GST DRC-07 under Section 74 of the respective GST Enactments for the tax periods spanning 2020-2021 to 2024-2025.

Revenue’s investigation revealed that the circular trading turnover of these entities ranged from 96.6% to 100% of their total purchase and sales turnover — indicating that nearly all transactions were paper-based, without any actual movement of goods. The stated motive was not to transfer fake ITC downstream, but to artificially inflate business turnover in order to avail bank loans and project themselves as major players in the medical equipment sector.

By the impugned orders, penalties equivalent to the ineligible ITC availed were levied under Section 122(1)(vii) (taking/utilising ITC without actual receipt of goods) and Section 122(1)(ii) (issuing invoices without actual supply). The aggregate penalties under the two provisions totalled approximately Rs. 12.34 crores and Rs. 13.68 crores respectively across all matters.

The petitioners challenged these orders before the Madras High Court under Article 226 of the Constitution, seeking to quash the impugned DRC-07 orders by way of Writ of Certiorari.

Contentions of the Assessee: The petitioners contended that (i) the maximum penalty imposable under Section 122(1) is capped at Rs. 10,000, and any penalty beyond that is unjustified; (ii) relying on the doctrine of proportionality as laid down by the Supreme Court in Coimbatore District Central Cooperative Bank, Charanjit Lamba, and S.R. Tewari, punishment must be commensurate with the gravity of misconduct; and (iii) the motive was not to defraud the Government through fake ITC transfer but merely to enhance turnover for credit facilities.

Issues:

• Whether the penalty leviable under Section 122(1)(ii) and Section 122(1)(vii) of the CGST Act for wrongfully availed ITC through circular trading is mandatorily equivalent to the amount of ineligible ITC availed/passed on, or whether it can be capped at Rs. 10,000 at the discretion of the Assessing Officer?
• Whether the doctrine of proportionality applicable under labour law and service law jurisprudence — as expounded by the Supreme Court in Coimbatore District Central Cooperative Bank, Charanjit Lamba, and S.R. Tewari — can be invoked to interfere with and reduce the statutory penalty prescribed under Section 122(1) of the respective GST Enactments?

Held:

The Hon’ble Madras High Court in W.P. Nos. 2628 of 2026 and connected matters held as under:

• Observed that, the impugned orders clearly established that the petitioner entities were engaged in circular trading with 1% or less genuine transactions, and the circular trading turnover constituted between 96.6% to 100% of their total turnover — conclusively demonstrating a systematic scheme to inflate turnover for banking purposes, without any real movement of goods.
• Noted that, the language in Section 122(1) of the respective GST Enactments uses the expression “whichever is higher,” which affords no discretion to the Assessing Officer to levy the lesser amount of Rs. 10,000. The impugned orders recorded adequate reasons showing proper application of mind, and therefore could not be found fault with on the ground of procedural irregularity.
• Noted further that, Section 11-AC of the Central Excise Act, 1944 — on which the Supreme Court’s ratio in Dharamendra Textile Processors and Rajasthan Spinning and Weaving Mills was based — is structurally different from Section 122 of the CGST Act, 2017; and that the Supreme Court itself had confined the said ratio to Section 11-AC alone. Therefore, the proportionality decisions from labour/service law jurisprudence cited by the petitioners cannot be transposed to the GST penalty framework.
• Held that, even if Section 122(1A) of the respective GST Enactments is applied, prima facie the assessee is liable to a penalty equivalent to the evaded or ineligible ITC availed or passed on. The petitioners, having wrongly availed ITC and passed on the credit to inflate turnovers to take undue advantage of the banking system, are prima facie liable to penalty under Section 122(1).
• Directed that, since the requirement of pre-deposit of 10% of the penalty under Section 107 of the respective GST Enactments would cause undue hardship and render the appellate remedy illusory given the magnitude of the penalties, the pre-deposit condition is dispensed with. The petitioners are granted liberty to file appeals before the Appellate Authority within thirty (30) days of receipt of this order, and the Appellate Authority is directed to dispose of the same preferably within ninety (90) days.

Our Comments:

• Relevant Provisions: Section 122(1) of the CGST Act, prescribes penalty for specific offences. Clause (ii) covers issuance of invoices without actual supply of goods or services, and Clause (vii) covers taking or utilising ITC without actual receipt of goods or services. For both clauses, the penalty is “ten thousand rupees or an amount equivalent to the tax evaded or the ITC availed/passed on, whichever is higher.” The use of the phrase “whichever is higher” is pivotal — it mandates that where the ITC wrongly availed is more than Rs. 10,000 (which will almost always be the case in substantial transactions), the penalty must equal the ITC amount, with no room for discretion.
• Section 74 of the CGST Act, governs determination of tax not paid or erroneously refunded or ITC wrongly availed or utilised by reason of fraud, wilful misstatement, or suppression of facts. Proceedings under this section carry a higher penalty exposure compared to Section 73, reflecting the gravity of fraudulent conduct.
• Section 122(1A) of the CGST Act, (inserted by the Finance Act, 2020) w.e.f 01-01-2021 further provides that any person who retains the benefit of circular trading or at whose instance such transactions are conducted shall also be liable to penalty equivalent to the amount of tax evaded or ITC availed.

Brief of Pari Materia / Contrary Judgments: The Supreme Court in Union of India v. Dharamendra Textile Processors, [(2008) 13 SCC 369], construed Section 11-AC of the Central Excise Act, 1944, as a mandatory penalty provision leaving no discretion once conditions of fraud/suppression are established. The Court in Union of India v. Rajasthan Spinning and Weaving Mills, [(2009) 13 SCC 448] clarified that the ratio in Dharamendra Textile is confined to Section 11-AC alone and cannot be extended to other statutory provisions. The Madras HC in the present case drew a clear distinction between Section 11-AC (which provides for penalty equal to duty determined) and Section 122(1) (which uses “whichever is higher” between Rs. 10,000 and ITC availed/passed on), and confirmed the mandatory, non-discretionary character of the GST penalty provision.

Significance: This decision is a significant precedent for the GST administration in cases of circular trading. It firmly closes the door on assessee seeking to invoke proportionality principles borrowed from labour or service jurisprudence to dilute statutory GST penalties. The Court’s practical relief — dispensing with the pre-deposit requirement for filing the Section 107 appeal — ensures that the appellate remedy remains accessible even where the penalty quantum is large, balancing fiscal discipline with procedural fairness.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

Ms.Amirtha Poonkodi Dinakaran, learned Government Advocate takes notice for the Respondent in W.P.Nos.2628, 2630, 2633, 4191, 3953 and 3949 of 2026, Mr.C.Harsharaj, learned Special Government Pleader takes notice for the Respondent in W.P.Nos.3206, 3211, 4088, 4101 and 4097 of 2026, Mrs.P.Selvi, learned Government Advocate takes notice for the Respondent in W.P.Nos.4107, 4113, 4117 and 3963 of 2026 and Mr.V.Prashanth Kiran, learned Government Advocate takes notice for the Respondent in W.P.Nos.2912, 2925, 2927 and 2982 of 2026.

2. These Writ Petitions are being disposed of at the time of admission with the consent of the learned counsel for the Petitioners, learned Special Government Pleader and the learned Government Advocates for the Respondents.

3. In these Writ Petitions, the respective Petitioners have challenged the respective Assessment Orders in Form GST DRC-07 passed under Section 74 of the respective GST Enactments for the Tax Periods from 2020-2021 to 2024-2025.

4. The details of the Writ Petitioners and the impugned Orders passed for the respective Tax Periods are detailed below:-

5. The issue involved in these Writ Petitions pertain to imposition of penalty under Section 122(1)(vii) and Section 122(1)(ii) of the respective GST Enactments on the respective Petitioners, the ineligible Input Tax Credit availed by the respective Petitioners and the alleged fake sales for passing such ineligible Input Tax Credit.

6. By the impugned Orders, the penalty imposed equivalent to the Input Tax Credit availed on circular trading is as detailed below:-

7. The case of the Petitioners is that though in the impugned Orders it has been recorded that the respective Petitioners were involved in circular trading and have 1% or less original transactions out of the transactions which were supposed by carried on to portray themselves as genuine tax payers, it has been stated that this is not the case.

8. It is submitted by the learned counsel for the Petitioners that in the impugned Orders it has been recorded that the Petitioners (tax payers) have boosted up their turn over and have billed themselves without any movement of goods and that their aim was to not transfer fake Input Tax Credit but to boost up their business turn over to get bank loans to create an image that they are big players in the medical equipment supply business.

9. Relevant portion from the Order dated 23.10.2025 (wrongly typed as 23.10.2024) for the Tax Period 2024-2025 in the case of Tvl.Sri Sana Enterprises was invited. It reads as under:-

“Total Purchase and sales Turnover of suspected tax payers involved in circular trading (Turnover is from period when circular trading was initiated not from the period of registrations for all tax payers except Tvl.Sana Enterprises)

(* CT refers to Circular Trading)

The above table shows that the above tax payers are involved in circular trading and has 1% or less original transactions that too were done to portray themselves as genuine tax payers but that is not the case. The above tax payers just to boost up their turnover has billed themselves without any goods movement and their aim is not transfer fake ITC but to boost up their business turnover to get bank loans, to create an image that they are big players in this medical equipment supply business.”

10. Learned counsel for the Petitioners would submit that in terms of Section 122(1) of the respective GST Enactments, the maximum penalty that could have been imposed on the Petitioner could only be restricted to Rs.10,000/- and therefore the impugned Orders imposing aforestated amount as penalty under Section 122(1)(ii) and Section 122(1)(vii) of the respective GST Enactments on the respective Petitioners is unjustified.

11. In this connection, the learned counsel for the Petitioners has drawn the attention of this Court to few decisions of the Hon’ble Supreme Court rendered in the context of punishment under the labour law jurisprudence, service law jurisprudence to state that imposition of penalty should be in proportion with the gravity of offence by applying the doctrine of proportionality. A reference is made to the following three decisions of the Hon’ble Supreme Court:-

i. Coimbatore District Central Cooperative Bank Coimbatore District Central Cooperative Bank Employees Association and another, (2007) 4 SCC 669.

ii. Charanjit Lamba Commanding Officer, Army Southern Command and others, (2010) 11 SCC 314.

iii. S. R.Tewari Vs. Union of India and another, (2013) 6 SCC 602.

12. In Coimbatore District Central Cooperative Bank case (referred to supra), the Hon’ble Supreme Court in Paragraph Nos.42 to 44 has observed as under:-

“42. In our considered view, the submission is well founded and deserves acceptance. Hence, even though we are of the view that the learned Single Judge was not right in granting benefits and the order passed by the Division Bench also is not proper, it would not be appropriate to interfere with the final order passed by the Division Bench. Hence, while declaring the law on the point, we temper justice with mercy. In the exercise of plenary power under Article 142 of the Constitution, we think that it would not be proper to deprive the 53 workmen who have received limited benefits under the order passed by the Division Bench of the High Court.

43. For the foregoing reasons, we hold that neither the learned Single Judge nor the Division Bench of the High Court was justified in interfering with the action taken by the Management and the award passed by the Labour Court, Coimbatore which was strictly in consonance with law. In peculiar facts and circumstances of the case and in exercise of power under Article 142 of the Constitution, we do not disturb the final order passed by the Division Bench of the High Court on 3-11-2004 in Writ Appeal No. 45 of 2001.

44. The appeal is accordingly disposed of in the above terms. In the facts and circumstances of the case, there shall be no order as to costs.”

14. In Charanjit Lamba case (referred to supra), the Hon’ble Supreme Court in Paragraph Nos.18 to 25 has observed as under:-

“18. We may refer to the decision of this Court in M.P. Gangadharan v. State of Kerala [(2006) 6 SCC 162] where this Court declared that the question of reasonableness and fairness on the part of the statutory authority shall have to be considered in the context of the factual matrix obtaining in each case and that it cannot be put in a straitjacket formula. The following passage is in this regard apposite:

“34. The constitutional requirement for judging the question of reasonableness and fairness on the part of the statutory authority must be considered having regard to the factual matrix obtaining in each case. It cannot be put in a straitjacket formula. It must be considered keeping in view the doctrine of flexibility. Before an action is struck down, the court must be satisfied that a case has been made out for exercise of power of judicial review. We are not unmindful of the development of the law that from the doctrine of Wednesbury unreasonableness, the court is leaning towards the doctrine of proportionality.”

19. That the punishment imposed upon a delinquent should be commensurate to the nature and generally of the misconduct, is not only a requirement of fairness, objectivity, and non­discriminatory treatment which even those form quality (sic) of a misdemeanour are entitled to claim but the same is recognised as being a part of Article 14 of the Constitution. It is also evident from the long line of decisions referred to above that the courts in India have recognised the doctrine of proportionality as one of the ground for judicial review. Having said that we need to remember that the quantum of punishment in disciplinary matters is something that rests primarily with the disciplinary authority. The jurisdiction of a writ court or the Administrative Tribunal for that matter is limited to finding out whether the punishment is so outrageously disproportionate as to be suggestive of lack of good faith.

20. What is clear is that while judicially reviewing an order of punishment imposed upon a delinquent employee the writ court would not assume the role of an appellate authority. It would not impose a lesser punishment merely because it considers the same to be more reasonable than what the disciplinary authority has imposed. It is only in cases where the punishment is so disproportionate to the gravity of charge that no reasonable person placed in the position of the disciplinary authority could have imposed such a punishment that a writ court may step in to interfere with the same.

21. The question then is whether the present is indeed one such case where the High Court could and ought to have interfered with the sentence imposed upon the appellant on the doctrine of proportionality. Our answer is in the negative.

22. The appellant was holding the rank of a Major in the Indian Army at the time he committed the misconduct alleged and proved against him. As an officer of a disciplined force like the Army he was expected to maintain the highest standard of honesty and conduct and forebear from doing anything that could be termed as unbecoming of anyone holding that rank and office. Making a false claim for payment of transport charges of household luggage and car to Chandigarh was a serious matter bordering on moral turpitude. Breach of the rule requiring him to clear his electricity dues upon his transfer from the place of his posting was also not creditworthy for an officer. The competent authority was therefore justified in taking the view that the nature of the misconduct proved against the appellant called for a suitable punishment.

23. Inasmuch as the punishment chosen was dismissal from service, the competent authority, did not in our opinion, take an outrageously absurd view of the matter. We need to remember that the higher the public office held by a person the greater is the demand for rectitude on his part. An officer holding the rank of Major has to lead by example not only in the matter of his readiness to make the supreme sacrifice required of him in war or internal strife but even in adherence to the principles of honesty, loyalty and commitment. An officer cannot inspire those under his command to maintain the values of rectitude and to remain committed to duty if he himself is found lacking in that quality.

24. Suffice it to say that any act on the part of an officer holding a commission in the Indian Army which is subversive of army discipline or high traditions of the Army renders such person unfit to stay in the service of the nation’s Army especially when the misconduct has compromised the values of patriotism, honesty and selflessness which values are too precious to be scarified on the altar of petty monetary gains, obtained by dubious means.

25. In the result this appeal fails and is hereby dismissed.”

14. In S.R.Tewari case (referred to supra), the Hon’ble Supreme Court in Paragraph Nos.30 to 35 has observed as under:-

“30. The findings of fact recorded by a court can be held to be perverse if the findings have been arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant/inadmissible material. The finding may also be said to be perverse if it is “against the weight of evidence”, or if the finding so outrageously defies logic as to suffer from the vice of irrationality. If a decision is arrived at on the basis of no evidence or thoroughly unreliable evidence and no reasonable person would act upon it, the order would be perverse. But if there is some evidence on record which is acceptable and which could be relied upon, the conclusions would not be treated as perverse and the findings would not be interfered with. (Vide Rajinder Kumar Kindra v. Delhi Admn. [(1984) 4 SCC 635 : 1985 SCC (L&S) 131 : AIR 1984 SC 1805] , Kuldeep Singh v. Commr. of Police [(1999) 2 SCC 10 : 1999 SCC (L&S) 429 : AIR 1999 SC 677] , Gamini Bala Koteswara Rao v. State of A.P. [(2009) 10 SCC 636 : (2010) 1 SCC (Cri) 372 : AIR 2010 SC 589] and Babu v. State of Kerala [(2010) 9 SCC 189 : (2010) 3 SCC (Cri) 1179] .)

31. Hence, where there is evidence of malpractice, gross irregularity or illegality, interference is permissible.

32. So far as Charge 4 is concerned, the matter was considered by a Board consisting of several officers and the appellant could not have been selectively targeted for disciplinary action. Further, no material could be placed on record that BSF had ever formulated a policy for regularisation of a temporary teacher as a regular teacher and in such a fact situation, the appellant could not have regularised the services of Shri Majumdar as a school teacher, even if he had the experience of 10 years. (This was not even a charge against the appellant nor was there any finding of the inquiry officer, nor has such a matter been agitated before the Tribunal.)

33. It is evident from the record that as per Letter dated 4-4-2013 sent by the Government of India to the appellant through the Chief Secretary, Andhra Pradesh, the proposed punishment is as under:

“A penalty of withholding two increments for one year without cumulative effect, be imposed on the appellant as a punishment under Rule 6 of the All India Services (Discipline and Appeal) Rules, 1969.”

34. The proved charges remained only Charges 4 and 6 and in both the cases the misconduct seems to be of an administrative nature rather than a misconduct of a serious nature. It was not the case of the Department that the appellant had taken the escort vehicle with him. There was only one vehicle which was an official vehicle for his use and Charge 6 stood partly proved. In view thereof, the punishment of compulsory retirement shocks the conscience of the Court and by no stretch of imagination can it be held to be proportionate or commensurate to the delinquency committed by and proved against the appellant. The only punishment which could be held to be commensurate to the delinquency was as proposed by the Government of India to withhold two increments for one year without cumulative effect. It would have been appropriate to remand the case to the disciplinary authority to impose the appropriate punishment. However, considering the chequered history of the case and in view of the fact that the appellant had remained under suspension for 11 months, suffered the order of dismissal for 19 months and would retire after reaching the age of superannuation in December 2013, the facts of the case warrant that this Court should substitute the punishment of compulsory retirement to the punishment proposed by the Union of India i.e. withholding of two increments for one year without having cumulative effect.

35. In view thereof, we do not want to proceed with the contempt petitions. The appeals as well as the contempt petitions stand disposed of accordingly.”

15. Ms.Amirtha Poonkodi Dinakaran, learned Government Pleader for the Respondents in W.P.Nos.2628, 2630, 2633, 4191, 3953 and 3949 of 2026 submits that the Respondents be given time to file a Counter Affidavit, as invariably Writ Petitions rejected in limine are taken up for appeal before the Division Bench of this Court where the Respondents are directed to file a Counter Affidavit to justify the orders of the Writ Court.

16. Ms.Amirtha Poonkodi Dinakaran, learned Government Pleader for the Respondents in W.P.Nos.2628, 2630, 2633, 4191, 3953 and 3949 of 2026 for the Respondents has however drawn the attention of this Court to the decision of the Hon’ble Supreme Court in Union of India Vs. Dharamendra Textile Processors and others, (2008) 13 SCC 369. Specifically, reference is made to Paragraph Nos.17 to 20, which are reproduced below:-

“17. It is of significance to note that the conceptual and contextual difference between Section 271(1)(c) and Section 276-C of the IT Act was lost sight of in Dilip Shroff case.

18. The Explanations appended to Section 271(1)(c) of the IT Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilip N. Shroff case has not considered the effect and relevance of Section 276-C of the IT Act. Object behind enactment of Section 271(1)(c) read with Explanations indicate that the said Section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276-C of the IT Act.

19. In Union Budget of 1996-1997, Section 11-AC of the Act was introduced. It has made the position clear that there is no scope for any discretion. In Para 136 of the Union Budget reference has been made to the provision stating that the levy of penalty is a mandatory penalty. In the Notes on Clauses also the similar indication has been given.

20. Above being the position, the plea that Rules 96-ZQ and 96-ZO have a concept of discretion inbuilt cannot be sustained. Dilip Shroff case was not correctly decided but SEBI case has analysed the legal position in the correct perspectives. The reference is answered. The matter shall now be placed before the Division Bench to deal with the matter in the light of what has been stated above, only so far as the cases where challenge to vires of Rule 967-Q(5) are concerned. In all other cases the orders of the High Court or the Tribunal, as the case may be, are quashed and the matter remitted to it for disposal in the light of present judgments. Appeals except Civil Appeals Nos.3397 & 3398-99 of 2003, 4096 of 2004, 3388 & 5277 of 2006, 4316, 4317, 675 and 1420 of 2007 and appeal relating to SLP(C) No.21751 of 2007 are allowed and the excepted appeals shall now be placed before the Division Bench for disposal.”

17. Ms.Amirtha Poonkodi Dinakaran, learned Government Advocate for the Respondents in W.P.Nos.2628, 2630, 2633, 4191, 3953 and 3949 of 2026 for the Respondents has also drew attention to the decision of the Hon’ble Supreme Court in Union of India Vs. Rajasthan Spinning and Weaving Mills, (2009) 13 SCC 448, wherein in Paragraph Nos.32 and 34, the Hon’ble Supreme Court observed as under:-

“32. After referring to a number of decisions on interpretation and construction of statutory provisions, in ELT paras 26 and 27 of the decision, the Court observed and held as follows:

“19. In Union Budget of 1996-1997, Section 11-AC of the Act was introduced. It has made the position clear that there is no scope for any discretion. In Para 136 of the Union Budget reference has been made to the provision stating that the levy of penalty is a mandatory penalty. In the Notes on Clauses also the similar indication has been given.

20. Above being the position, the plea that Rules 96-ZQ and 96-ZO have a concept of discretion inbuilt cannot be sustained. Dilip Shroff case was not correctly decided but SEBI case has analysed the legal position in the correct perspectives. The reference is answered.”

From the above, we fail to see how the decision in Dharamendra Textile can be said to hold that Section 11-AC would apply to every case of non­payment or short-payment of duty regardless of the conditions expressly mentioned in the Section for its application. There is another very strong person for holding that Dharamendra Textile could not have interpreted Section 11-AC in the manner as suggested because in that case that was not even the stand of the Revenue.

34. The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of Section 11-AC would depend upon the existence or otherwise of the conditions expressly stated in the Section, once the Section is applicable in a case the Authority concerned would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under Sub-Section (2) of Section 11-A. That is what Dharamendra Textile decides. It must, however, be made clear that what is stated above in regard to the decision in Dharamendra Textile is only insofar as Section 11-AC is concerned. We make no observations (as a matter of fact there is no occasion for it!) with regard to the several other statutory provisions that came up for consideration in that decision.”

18. To arrive at the above conclusion, one has to read the discussion in Paragraph Nos.30, 31, 33 and 35 of the aforesaid Judgment. They are reproduced below:-

“30. At this stage, we need to examine the recent decision of this Court in Dharamendra Textile. In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case of non-payment of short-payment of duty the penalty clause would automatically get attracted and the Authority had no discretion in the matter. One of us was a party interpreted Section 11-AC in the manner as suggested because in that case that was not even the stand of the Revenue.

31. In Dharamendra Textile the Court framed the issues before it, in ELT para 2 and 3 of the decision, as follows:

“2. A Division Bench of this Court has referred the controversy involved in these appeals to a larger Bench doubting the correctness of the view expressed in Dilip N. Shroff Vs. CIT. The question which arises for determination in all these appeals is whether Section 11-AC of the Central Excise Act, 1944 (in short ‘the Act’) inserted by the Finance Act, 1996 with the intention of imposing mandatory penalty on persons who evaded payment of tax should be read to contain mens rea as an essential ingredient and whether there is a scope for levying penalty below the prescribed minimum. Before the Division Bench, stand of the Revenue was that the said Section should be read as penalty for statutory offence and the Authority imposing penalty has no discretion in the matter of imposition of penalty and the adjudicating authority in such cases was duty-bound to impose penalty equal to the duties so determined. The assessee on the other hand referred to Section 271(1)(c) of the Income Tax Act, 1961 (in short ‘the IT Act’) taking the stand that Section 11-AC of the Act is identically worded and in a given case it was open to the assessing officer not to impose any penalty.

The Division Bench made reference to Rule 96-zQ and Rule 96-ZO of the Central Excise Rules, 1944 (in short ‘the Rules’) and a decision of this Court in SEBI Vs. Shriram Mutual Fund and was of the view that the basic scheme for imposition of penalty under Section 271(1)(c) of the IT Act, Section 11-AC of the Act and Rule 96-ZQ(5) of the Rules is common. According to the Division Bench the correct position in law was laid down in SEBI case and not in Dilip Shroff case. Therefore, the matter was referred to a larger Bench.”

33. In ELT para 5 of the decision in Dharamendra Textile case the Court noted the submission made on behalf of the Revenue as follows:

“6. Mr.Chandrashekharan, Additional Solicitor General submitted that in Rules 96-ZQ and 96-ZO there is no reference to any mens rea as in Section 11-AC where mens rea is prescribed statutorily. This is clear from the extended period of limitation permissible under Section 11-A of the Act. It is in essence submitted that the penalty is for statutory offence. It is pointed out that the proviso to Section 11-A deals with the time for initiation of action. Section 11-AC is only a mechanism for computation and the quantum of penalty. It is stated that the consequences of fraud, etc., relate to the extended period of limitation and the onus is on the Revenue to establish that the extended period of limitation is applicable. Once that hurdle is crossed by the Revenue, the assessee is exposed to penalty and the quantum of penalty is fixed. It is pointed out that even if in some statutes mens rea is specifically provided for, so is the limit or imposition of penalty, that is, the maximum fixed or the quantum has to be between two limits fixed. In the cases at hand, there is no variable and, therefore, no discretion.

7. It is pointed out that prior to insertion of Section 11-AC, Rule 173-Q was in vogue in which no mens rea was provided for. It only stated ‘which he knows or has reason to believe’. The said clause referred to wilful action. According to learned counsel what was inferentially provided in some respects in Rule 173-Q, now stands explicitly provided in Section 11-AC. Where the outer limit of penalty is fixed and the statute provides that it should not exceed a particular limit, that itself indicates scope for discretion but that it not the case here.”

35. In light of the discussion made above it is evident that in both the appeals, orders were passed by the Tribunal on a wrong premise. In both the appeals, therefore, the impugned orders passed by the Tribunal are set aside and the matters are remitted to the respective Tribunals for fresh consideration, in accordance with law, and in light of this judgment. As the matters are quite old it is hoped and expected that the Tribunal would pass the final order within four months from the date of receipt of this order. The two appeals are allowed but with no order as to costs.”

19. Yesterday i.e., on 17.02.2026, W.P.Nos.3958 of 2026 and 4094 of 2026 were dismissed by granting liberty to the Petitioners to file an appeal before the Appellate Authority subject to usual terms.

20. The impugned Orders have also recorded the objective of circular trading after considering the submissions of the learned counsel for the Petitioners before the Respondent(s) during the assessment proceedings.

21. As such, there is no procedural irregularity in the impugned Orders. The language in Section 122(1) of the respective GST Enactments also does not give any discretion to the Assessing Officer to levy lesser of the amount i.e., Rs.10,000/- as the expression used is “whichever is higher”.

22. The impugned Orders cannot be found fault as adequate reasons have been given and shows application of mind by the Respondent(s) / Assessing Officer(s) while passing the impugned Orders.

23. The above decisions of the Hon’ble Supreme Court cannot be applied to the facts of the case specifically in the light of the language in Section 122(1) of the respective GST Enactments. The expression used in Section 122(1) is “whichever is higher”.

24. Section 11-AC of the Central Excise Act, 1944 which fell for consideration is the above-mentioned decision of the Hon’ble Supreme Court is different from Section 122 of the respective GST Enactments. The Hon’ble Supreme Court in Union of India Vs. Rajasthan Spinning and Weaving Mills, (2009) 13 SCC 448, has pointed out that the ratio was confined to Section 11-AC of the Central Excise Act, 1944 and no observations with regard to the several other statutory provisions that came up for consideration in that decision.

25. For the sake of clarity, Section 122(1)(vii) of the Central Goods and Services Tax Act, 2017 and Section 11-AC of the Central Excise Act, 1944, which fell for consideration in these two decisions are extracted hereunder:-

26. Even if Section 122(1A) of the respective GST Enactments is to be applied, prima facie indications are that an assessee is liable to a penalty of an amount equivalent to the evaded or ineligible Input Tax Credit availed of or passed on. No doubt that the Petitioners have wrongly availed the Input Tax Credit and have apparently passed on the credit to boost up their respective turn overs with a view to take undue advantage of the system, prima facie they are liable to penalty under Section 122(1) of the respective GST Enactments.

27. The provisions of the respective GST Enactments contemplate an appellate remedy before the Appellate Authority under Section 107 of the respective GST Enactments and further appeal before GST Tribunal under Section 122 of the respective GST Enactments and thereafter remedy before the High Court. The finer aspects of law at best can be left to be decided by the Division Bench of this Court in its appellate jurisdiction under Section 117 of the respective GST Enactments which is in line with the Judgment of the Hon’ble Supreme Court in Chandrakumar Vs. Union of India and others, (1997) 3 SCC 261.

28. The Petitioner cannot short circuit the statutory mechanism prescribed by citing the decisions and the principle laid under the indirect tax enactments which have been subsumed into the respective GST Enactments.

29. As such, the present Writ Petitions are liable to be dismissed. However, liberty is granted to the Petitioners to file an appeal before the Appellate Authority within a period of thirty (30) days from the date of receipt of a copy of this order.

30. Since pre-deposit of huge penalty as prescribed under Section 107 of the respective GST Enactments will cause undue hardship to the respective Petitioners and make the appellate remedy illusory, pre-deposit of 10% of penalty under Section 107 of the respective GST Enactments is dispensed with at the time of filing the appeals before the Appellate Authority.

31. In case the Petitioners files such an appeal before the Appellate Authority, the same shall be disposed of on merits and in accordance with law after hearing the Petitioners, as expeditiously as possible, preferably, within a period of ninety (90) days from the date of receipt of a copy of this order.

32. These Writ Petitions are dismissed with the above liberty. No costs. Connected Writ Miscellaneous Petitions are closed.

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