In the complex legal framework of the Goods and Services Tax (GST) in India, every judicial interpretation can have far-reaching implications. One such pivotal judgment recently came from the Madras High Court in the case of P.R. HARDWARES, REPRESENTED BY ITS PROPRIETRIX MRS. RANJITHAM VERSUS THE STATE TAX OFFICER, 2023 (9) TMI 43. The verdict sheds light on two significant aspects: the time frame within which adjudication under Section 74 of the Central Goods and Services Tax (CGST) Act, 2017 must be completed, and the quantum of penalty imposed in such cases. This article aims to analyze the details of the case and its potential impact on GST-related proceedings in India.
In this judgement honorable Madras High Court has established a very significant ratio regarding completing the adjudication under Section 74 of the Act. Court observed that the time limit to complete the adjudication is prescribed as 5 years from the due date of filing of annual return for a particular financial year. There is no minimum time slot prescribed within which adjudication under sec 74 is required to be completed.
Under this particular judgement, the honorable court propounded that if notice for adjudication was issued and order passed within 2 months from the date of notice, then it is a violation of the principle of natural justice.
It shall be considered that sufficient opportunity is not provided to the registered person for reply to said notice.
Another issue which was decided by the honorable court was regarding the quantum of penalty. Order passed under section 74 imposed a 100% penalty over tax amount. Although registered person before preferring this application deposited the disputed tax and interest.
Facts of the case are as follows-:
The brief facts of the case are that the petitioner is doing business of Trading Electrical goods and he is an assessee under GST in registration GSTIN/33AGHPR4673BIZH. The respondent has issued notice, namely FORM GST DRC-01A, dated 01.12.2022, directing the petitioner to explain the discrepancies in the returns filed by the petitioner. Thereafter another Notice, dated 03.01.2023 was also issued. The petitioner could not submit his reply due to his illness. Hence the respondent proceeded further and issued Summary Order, dated 07.03.2023 and the details of the proposal is as under:
| Details of Demand : |
| ● Tax: 1,57,934.00 |
| ● Interest: 21,288.00 |
| ● Penalty: 1,57,934.00 |
The petitioner submits that, as against the demand in summary of order, the petitioner has already paid for Rs. 1,57,934 on 24.06.2023 which is more than 10% of Pre-deposit required to be remitted to file an appeal under section 107 of the Act.
The contention of the petitioner is that there is a violation of principles of natural justice before passing the summary order. Moreover, the respondents have passed an order based on the assumption and the same is not justifiable. Hence the petitioner is before this Court.
The respondents have passed the assessment order, where they have stated that the petitioner has relied on the Invoice No.112 which was issued by the supplier Tvl. Mahaa Agency with GSTIN number, but the said invoice is issued without actual supply of goods received by the petitioner. During the search conducted at the place of business of Tvl. Mahaa Agency it has been ascertained it is a non-existent taxpayer. In turn the petitioner had claimed ITC from a non-existent taxpayer. Therefore, ITC claimed by the petitioner based on such invoice cannot be entertained. Hence, the respondent has proceeded to impose tax on the fraudulent claim ITC and the tax was determined as under:
| Tax Type | Amount (Rs.) |
|---|---|
| CGST | Rs. 78,967 |
| SGST | Rs. 78,967 |
The respondent has further proceeded to impose penalty which is stated hereunder:
| Tax Type | Amount (Rs.) |
|---|---|
| CGST Penalty | Rs. 78,967 |
| SGST Penalty | Rs. 78,967 |
The respondent also imposed interest and the same is stated hereunder:
| Tax Type | Amount (Rs.) |
|---|---|
| CGST Interest | Rs. 10,644 |
| SGST Interest | Rs. 10,644 |
The petitioner submitted that under Section 74(9), the respondents shall consider the representation of the assessee, then determine the tax, interest and penalty. However, Section 74(10) it is stated that the officer shall issue the order under Section 74(9) within a period of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilized relates to or within five years from the date of erroneous refund. Therefore, the petitioner submits within one month, the entire process is over, therefore, the respondent has failed to grant opportunity granted under section 74(9) and 74(10) of the Central Goods and Services Tax Act, 2017 and the relevant portion is extracted here under:
”74. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of facts:
…
The proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order
The proper officer shall issue the order under sub-section (9) within a period of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilized relates to or within five years from the date of erroneous refund.
On perusal of the aforesaid provisions, it is seen that the respondents are empowered to pass order within a period of five years. But the Learned Counsel Additional Government Pleader submitted that the time is only outer limit and it is not barring the respondents from passing order before five years. After hearing the rival submission this Court is of the considered opinion that, if it is considered as an outer time limit prescribed for the respondents to pass orders, then the respondents may be empowered to pass orders. But the assessee must be given sufficient opportunity. In the present case the notice was issued on 01.12.2022 and 03.01.2023 and Summary Order was passed on 07.03.2023, i.e. within two months the respondents have passed an order. Even though the provisions prescribe five years as outer limit but the provisions do not prescribe minimum time from passing order, in such circumstances the respondents ought to have passed order within reasonable time. Two months period definitely is not reasonable time and the petitioner is right in stating that adequate opportunity was not granted to the petitioner.
As far as imposition of penalty is concerned, the respondents have imposed 100% penalty. The provision grants concession for the assessee to pay 15% of penalty if the assessee pays the tax, interest prior to issuance of notice under section 74(1). The provisions further state that if the assessee pays the tax, interest after issuance of notice, then the assessee shall pay 25% of penalty. Further the provisions state that if the assessee pays tax, interest within one of passing the order, then the assessee shall pay 50% of such penalty. If the tax and interest is paid as per the timeline stated supra then all proceedings in respect of the said notice shall be deemed to have been concluded. The contention of the petitioner is that since he has paid the entire tax demand on 26.06.2023 the petitioner is entitled to the benefits under section 74. But the Learned Additional Government Pleader submitted that the petitioner has paid the tax beyond the period of one month from the date of the order, hence the petitioner is not entitled to such concession granted under the section 74.
After considering the rival submissions this Court is of the considered opinion that the respondents have completed the entire proceedings within two months and there is violation of principles of natural justice. Also, this Court has held that the respondents ought to have concluded the proceedings within reasonable time even though the outer time limit is five years. By passing the orders early, the respondent have denied the valuable right of the petitioner to avail the concession granted under section 74. The petitioner has already paid the entire tax liability and the interest. Therefore, this Court is directing the respondents to collect the 15% of the penalty alone and the petitioner shall pay the 15% penalty within four weeks from the date of receipt of the order. On such payment the respondents shall conclude the proceedings in respect of the notice as stated in section 74. With these observations and directions, this Writ Petition is allowed. No Costs
Key Takeaways
i. The Time Limit for Adjudication
The CGST Act’s Section 74 sets a maximum period of 5 years for completing adjudication proceedings, counting from the due date of filing the annual return for the relevant financial year. However, the Act does not specify a minimum time limit. The Madras High Court in its judgment emphasized that adjudication completed in an unduly short period (in this case, two months) violates the principles of natural justice. According to the court, this rapid adjudication deprives the concerned party of adequate time to respond to notices and engage in the legal process, thus raising questions on fair play and equity.
ii. Quantum of Penalty
Another significant aspect of the judgment was the quantum of penalty. The court examined Section 74 in detail and concluded that the penalty amount must align with specific conditions laid down in the Act. In the given case, the court found that a 100% penalty was unjustifiable, given that the accused had already deposited the disputed tax and interest. As such, the court reduced the penalty to 15% of the total tax amount.
iii. Context and Implications
Understanding the judgment in the context of the presented facts reveals its significance. P.R. HARDWARES was accused of claiming Input Tax Credit (ITC) from a non-existent taxpayer, which led to the hasty adjudication proceedings and penalty imposition. The court’s ruling stresses the importance of due process and equitable justice, which can serve as a cornerstone for similar cases in the future.
Conclusion
The Madras High Court’s judgment in P.R. HARDWARES vs. THE STATE TAX OFFICER is monumental for clarifying two critical aspects related to adjudication under Section 74 of the CGST Act, 2017. Firstly, it outlines the necessity of reasonable time for adjudication, safeguarding the principles of natural justice. Secondly, it sets a precedent for the appropriate quantum of penalty, offering relief and fairness to the assessee. This judicial clarification will likely have a profound impact on how future adjudication and penalty cases under the CGST Act are conducted.
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