Sri Ram Traders Vs Prakhar Pratap Singh (GSTAT Lucknow)
Summary: The Goods and Services Tax Appellate Tribunal (GSTAT), Lucknow Bench, allowed the appeal filed by M/s Sri Ram Traders against the remaining demand of interest amounting to ₹1,65,748 and penalty of ₹23,620 sustained by the First Appellate Authority for FY 2020-21. The dispute arose from excess input tax credit (ITC) of ₹2,30,206, comprising CGST and SGST of ₹1,15,103 each, which the appellant had voluntarily reversed through FORM GST DRC-03 on 21 October 2024. The original adjudicating authority had confirmed a total demand of ₹24,00,258, including tax of ₹11,86,360, interest of ₹10,95,262 and penalty of ₹1,18,636. Although the First Appellate Authority set aside the entire substantive tax demand and most of the consequential interest and penalty, it retained interest of ₹1,65,748 and penalty of ₹23,620, prompting the appellant to approach the Tribunal.
The appellant contended that the disputed ITC had never been utilised for discharging output tax liability and that sufficient unutilised credit had continuously remained available in its Electronic Credit Ledger. Relying on Section 50(3) of the CGST Act, 2017, Rule 88B(3) of the CGST Rules, 2017, and CBIC Circular No. 192/04/2023-GST dated 17 July 2023, the appellant argued that interest could arise only where wrongly availed ITC had also been utilised. The Tribunal directed departmental verification of the Electronic Credit Ledger, following which the State Tax Officer confirmed that the available credit balance had never fallen below the disputed amount. The Tribunal observed that Section 50(3), retrospectively amended with effect from 1 July 2017, requires both wrongful availment and utilisation of ITC. Since the statutory condition of utilisation was not satisfied, the remaining interest demand of ₹1,65,748 was held to be legally unsustainable.
Regarding the residual penalty of ₹23,620 under Section 73 of the CGST Act, the Tribunal observed that the First Appellate Authority had already annulled the entire substantive tax demand of ₹11,86,360 and that the department had not established any independent statutory basis for retaining the penalty. It held that a penalty could not be sustained mechanically without examining the underlying facts and statutory requirements. Accordingly, GSTAT Lucknow set aside the remaining interest demand of ₹1,65,748 and penalty of ₹23,620, holding that unutilised ITC did not attract interest under Section 50(3) and that the residual penalty was unsustainable in the circumstances. The appeal was allowed by order dated 5 November 2026.
FULL TEXT OF THE ORDER OF GSTAT LUCKNOW
1. BRIEF FACTS OF THE CASE
1.1. The present appeal has been filed by M/s Sri Ram Traders, holding GSTIN 09ALFPJ6214K1ZZ, against Order-in-Appeal No. GST/127/2025 dated 16.06.2025, passed by the Additional Commissioner, Grade-II (Appeal)-5, State Tax, Lucknow, arising out of Order-in-Original No. ZD0902252669051 dated 20.02.2025, passed by the State Tax Officer, Sector-1, Barabanki, under Section 73 of the UPGST Act, 2017, for the Financial Year 2020-21.
1.2. The dispute originated during scrutiny of the returns furnished by the appellant for the aforesaid financial year. In this regard, a notice in Form GST ASMT-10 bearing ARN ZD0909242379012 dated 24.09.2024 was issued, pointing out certain discrepancies in the returns furnished by the appellant. The discrepancies primarily related to the following two issues:
(i) Excess availment of Input Tax Credit: The ITC claimed by the appellant in Form GSTR-3B was Rs.21,27,272.00, whereas the ITC reflected in Form GSTR-2A was Rs.18,97,066.00, resulting in an alleged excess claim of ITC amounting to Rs.2,30,206.00, comprising CGST of Rs.1,15,103.00 and SGST of Rs.1,15,103.00.
(ii) Difference in tax liability: The tax liability declared in Form GSTR-1 was Rs.32,23,620.00, whereas the liability reported in Form GSTR-3B was Rs.20,37,260.00, resulting in an alleged short payment of tax amounting to Rs.11,86,360.00.
1.3. In response to the aforesaid notice, the appellant furnished its reply in Form GST ASMT-11 dated 21.10.2024. In respect of the discrepancy relating to excess availment of ITC, the appellant voluntarily reversed the disputed ITC of Rs.2,30,206.00, comprising CGST of Rs.1,15,103.00 and SGST of Rs.1,15,103.00, through Form GST DRC-03 bearing ARN AD091024141016K dated 21.10.2024 before issuance of the Show Cause Notice.
1.4. Subsequently, a Show Cause Notice in Form GST DRC-01 bearing reference No. ZD091124403373Q dated 26.11.2024 was issued under Section 73 of the Act, proposing a demand of tax amounting to Rs.11,86,360.00, along with applicable interest under Section 50 and penalty under Section 73(9) of the Act. The adjudicating authority, vide Order-in-Original No. ZD0902252669051 dated 20.02.2025, passed an ex-parte order confirming a total demand of Rs.24,00,258.00, comprising tax of Rs.11,86,360.00, interest of Rs.10,95,262.00 and penalty of Rs.1,18,636.00.
1.5. Being aggrieved by the aforesaid order, the appellant preferred an appeal before the First Appellate Authority. The learned First Appellate Authority, after examining the relevant records, including the audited financial statements and annual returns in Form GSTR-9, set aside the entire tax demand of Rs.11,86,360.00, along with the major portion of the interest and penalty.
However, the learned First Appellate Authority sustained interest amounting to Rs.1,65,748.00, comprising CGST of Rs.82,874.00 and SGST of Rs.82,874.00, on the disputed ITC reversed by the appellant. A residual penalty of Rs.23,620.00, comprising CGST of Rs.11,810.00 and SGST of Rs.11,810.00, was also sustained.
1.6. The appellant is aggrieved only to the extent that the learned First Appellate Authority has sustained the aforesaid interest and penalty, despite the fact that the disputed ITC had been reversed and, according to the appellant, had never been utilised for payment of output tax liability. Accordingly, the appellant has preferred the present appeal before this Tribunal.
1.7. The present case was listed before the Single Bench. As allotted by the Hon’ble Vice President of GSTAT, Uttar Pradesh. The appellant was represented by Shri Satya Prakash, Advocate (“hereinafter referred as the appellant) and respondent was represented by Shri Sanjeev Kumar, Deputy Commissioner, SGST (“hereinafter referred as the Ld. Respondent”).
2. Grounds and Contention’s of the Appellant
2.1. The appellant submitted that the excess ITC amounting to Rs.2,30,206.00, comprising CGST of Rs.1,15,103.00 and SGST of Rs.1,15,103.00, was inadvertently reflected in Form GSTR-3B. It was contended that although the said credit was availed, it was never utilised towards discharge of the appellant’s output tax liability.
2.2. It was further submitted that the appellant, upon being pointed out the discrepancy during scrutiny proceedings, voluntarily reversed the entire disputed ITC through Form GST DRC-03 dated 21.10.2024. The appellant, therefore, contended that there was no intention to retain or utilise any ineligible credit.
2.3. The appellant further drew the attention of this Bench to the Electronic Credit Ledger of the appellant and submitted that, from the date of availment of the disputed ITC until its reversal, the available unutilised credit balance remained substantially higher than the disputed amount of Rs.2,30,206.00. It was specifically contended that the credit balance never fell below the amount of disputed ITC and, therefore, the condition of utilisation contemplated under Section 50(3) of the Act was never satisfied.
2.4. In support of the appellant’s contention, reliance was placed upon Section 50(3) of the CGST Act, 2017, as amended retrospectively with effect from 01.07.2017, Rule 88B(3) of the CGST Rules, 2017, and CBIC Circular No. 192/04/2023-GST dated 17.07.2023. It was submitted that interest under Section 50(3) is attracted only when the wrongly availed ITC has also been utilised.
2.5. It was also submitted that the departmental authorities failed to appreciate the legal distinction between availment and utilisation of ITC and mechanically sustained the interest liability without properly examining the Electronic Credit Ledger.
2.6. With regard to the penalty, the appellant submitted that once the entire substantive tax demand of Rs.11,86,360.00 had been set aside by the First Appellate Authority, no independent basis remained for sustaining the residual penalty of Rs.23,620.00 under Section 73 of the Act.
2.7. Accordingly, the appellant prayed that the impugned Order-in-Appeal be set aside to the extent of the sustained interest and penalty.
3. CONTENTIONS OF THE RESPONDENT
3.1. During the course of hearing, this Bench directed the Ld. Respondent appearing on behalf of the department to obtain and furnish a factual report from the jurisdictional authority regarding the availability and utilisation of ITC in the Electronic Credit Ledger of the appellant during the relevant period.
3.2. In compliance with the aforesaid direction, the Ld. Respondent furnished the departmental inquiry report and submitted by the State Tax Officer, Sector-1, Barabanki, Upon referring to the said report, the Ld. Respondent acknowledged before this Bench that sufficient credit balance was continuously available in the Electronic Credit Ledger of the appellant and that the balance had never fallen below & utilized by the appellant after the amount of disputed ITC reversed through Form GST DRC-03, in the facts of the present case, the liability to pay interest under Section 50(3) of the Act would not arise.
4. ISSUES FOR DETERMINATION
Upon consideration of the grounds of appeal and the material available on record, the following issues arise for determination by this Bench:
4.1. Whether interest under Section 50(3) of the CGST/UPGST Act, 2017, read with Rule 88B(3) of the CGST/UPGST Rules, 2017, is leviable on the disputed ITC when the appellant had sufficient unutilised balance in its Electronic Credit Ledger throughout the relevant period and the disputed ITC was reversed without having been utilised.
4.2. Whether the penalty sustained by the First Appellate Authority under Section 73 of the Act can legally survive when the substantive tax demand has already been set aside by the First Appellate Authority.
4.3. Heard and perused the record submitted by both the parties.
5. FINDINGS
5.1. This Bench has carefully considered the grounds of appeal, the submissions advanced by the learned authorised representative for the appellant, the submissions of the learned State Representative, the impugned Order-in-Appeal, the relevant statutory provisions and the material available on record.
The controversy in the present appeal is confined to the question of levy of interest on the disputed ITC of Rs.2,30,206.00, which stands reversed by the appellant through Form GST DRC-03 dated 21.10.2024, and the consequential sustainability of the residual penalty. The principal tax demand of Rs.11,86,360.00 has already been set aside by the First Appellate Authority and is not the subject matter of the present dispute. It is also no where mentioned/ submitted by the Ld. Respondent that any cross appeal has been filed by the department against the said order of First Appellate Authority.
A. Whether interest is leviable under Section 50(3) of the Act
5.2. At the outset, it is necessary to examine the statutory scheme governing the levy of interest on wrongly availed ITC. Section 50(3) of the CGST/UPGST Act, 2017, as amended retrospectively with effect from 01.07.2017, provides for the levy of interest where a registered person has wrongly availed and utilised input tax credit.
The use of the expression “wrongly availed and utilised” in the said provision is significant. The statutory provision does not contemplate the levy of interest merely because ITC has been wrongly availed. The requirement of utilisation is an additional statutory condition which must also be satisfied before interest liability can arise under Section 50(3).
5.3. The manner of determining such utilisation has been specifically prescribed under Rule 88B(3) of the CGST Rules, 2017. The relevant Explanation to the said Rule provides that ITC shall be deemed to have been utilised when the balance in the Electronic Credit Ledger falls below the amount of ITC wrongly availed. Thus, the statutory test for determining utilisation is linked to the availability of credit balance in the Electronic Credit Ledger.
Consequently, where the available balance in the Electronic Credit Ledger does not fall below the amount of wrongly availed ITC, such credit cannot be treated as having been utilised for the purpose of computation of interest under Section 50(3) of the Act.
5.4. The issue relating to the manner of considering the balance available in different heads of the Electronic Credit Ledger has also been clarified by the CBIC vide Circular No. 192/04/2023-GST dated 17.07.2023.
The said Circular clarifies that, for determining whether wrongly availed ITC has been utilised, the balance available in the Electronic Credit Ledger under the IGST, CGST and SGST heads is required to be considered collectively, in accordance with the methodology prescribed therein. The clarification further provides that where the aggregate balance in the Electronic Credit Ledger has not fallen below the amount of wrongly availed ITC, such ITC cannot be considered to have been utilised for the purpose of levy of interest under Section 50(3).
5.5. In the present case, the appellant has specifically contended that the disputed ITC of Rs.2,30,206.00 was never utilised and that sufficient unutilised credit remained available in its Electronic Credit Ledger throughout the relevant period. In support of this contention, the appellant has placed reliance upon the relevant credit ledger records.
5.6. The appellant has uploaded the verification report issued by Shri Shailesh Singh, State Tax officer, Khand -1, Barabanki regarding availability of the credit balance for the disputed period, which was also acknowledged by the Ld. Respondent. The relevant paras of the report are being reproduced below as uploaded onto the portal-
Vide Letter No. whatsapp / Report / Deputy Commissioner, State Tax, Division-1, Barabanki / 2025-26.
Please refer to the facts sent by you through WhatsApp, through which a report was expected to be provided regarding the case pending in the GST Appellate Tribunal of M/s Sri Ram Traders. In this regard, it is respectfully informed that all the notices, replies, and the report sent to the firm through WhatsApp, along with the order thereof, are being sent to you.
Regarding the determination of liability for interest on the excess claimed ITC by the appellant, the following facts were found on the GST portal:
“Upon checking the dealer’s credit ledger on the web portal, it was found that from April 1, 2020, to the date of order February 20, 2025, under the heads of CGST and SGST, the amount deposited via DRC-03 reference no. AD091024141016K of 115103 SGST and 115103 CGST has always maintained a higher credit balance.”
5.7. No contrary material has been brought on record by the Ld respondent to displace the factual position established by the said report, the facts and circumstances of the present case, the disputed ITC, though availed, cannot be treated as having been utilised within the meaning of Section 50(3) of the Act. The essential statutory condition for levy of interest has consequently not been fulfilled.
5.8. Accordingly, the levy of interest amounting to Rs.1,65,748.00, comprising CGST of Rs.82,874.00 and SGST of Rs.82,874.00, sustained by the First Appellate Authority is not legally sustainable and deserves to be set aside.
B. Whether the residual penalty is sustainable
5.9. The next issue for consideration is whether the residual penalty of Rs.23,620.00, comprising CGST of Rs.11,810.00 and SGST of Rs.11,810.00, sustained by the First Appellate Authority under Section 73 of the Act, can survive independently.
5.10. It is an admitted position on record that the original adjudicating authority had confirmed a tax demand of Rs.11,86,360.00 on account of the alleged difference between the liability declared in Form GSTR-1 and Form GSTR-3B. However, the learned First Appellate Authority, after examining the relevant records, including the audited financial statements and annual returns furnished by the appellant, set aside the entire aforesaid tax demand.
Thus, the substantive tax demand forming the basis of the original proceedings no longer survives.
5.11. This Bench observes that a penalty under Section 73 of the Act cannot be sustained merely as a matter of course. Its imposition must have a valid statutory foundation and must be supported by the facts and circumstances of the case. Once the entire substantive tax demand has been set aside by the First Appellate Authority, the sustainability of the consequential penalty necessarily requires examination in the light of the findings recorded in the appellate proceedings.
5.12. In the present case, no independent basis for sustaining the residual penalty has been demonstrated by the respondent, particularly when the entire tax demand has already been set aside and the alleged utilisation of the disputed ITC has also not been established. This Bench finds that the residual penalty of Rs.23,620.00 sustained by the First Appellate Authority is also not sustainable on the facts and circumstances of the present case and deserves to be set aside.
6. Therefore, the disputed ITC cannot be treated as utilised within the meaning of Section 50(3) of the Act, and no interest is leviable thereon. Further, in the absence of a sustainable substantive tax demand or any independent statutory basis, the residual penalty also cannot be sustained.
ORDER
(i) The appeal is Allowed.
(ii) The remaining demand of interest and penalty sustained by the learned First Appellate Authority under the impugned Order-in-Appeal is hereby set aside and quashed.
The order pronounced in the open court on 05.11.2026.
