Technical Errors in ITC Reporting Not Warrant Penalties under Section 73 of CGST Act: Kerala HC
Summery: The Kerala High Court, in Rejimon Padickapparambil Alex v. Union of India [WA No. 54 of 2024 dated November 26, 2024], has clarified that inadvertent errors in reporting Input Tax Credit (ITC) under the wrong head do not constitute wrongful availment, thereby rendering proceedings under Section 73 of the CGST Act for imposing interest and penalty untenable. This landmark judgment reinforces the principle that technical mistakes without revenue loss or fraudulent intent should not attract penal actions.
Facts:
The Appellant, a proprietorship named ‘Padiken Silks’, is a registered GST dealer. During the filing of Form GSTR-3B, the Appellant erroneously reported IGST as CGST and SGST. This led to a mismatch between Forms GSTR-2A and GSTR-3B. The Assessing Authority interpreted this discrepancy as the utilization of unavailable credit and issued a notice demanding interest and penalties under Section 73 of the CGST Act.
The Appellant challenged the demand before the Hon’ble Kerala High Court. However, the Single Judge Bench dismissed the petition. Dissatisfied, the Appellant filed an appeal before the Division Bench.
Issue:- Whether proceedings under Section 73 of the CGST Act, imposing interest and penalties for availing ITC under the wrong head, are maintainable?
Held:- The Division Bench set aside the demand, emphasizing the following:
Applicability of Section 73:
Section 73 is invoked when tax has not been paid, short paid, erroneously refunded, or where ITC has been wrongly availed or utilized.
In this case, the error was purely technical, involving the misreporting of IGST as CGST and SGST, without any wrongful availment of credit.
Absence of Revenue Loss:
The Court noted no outward supply attracting IGST, and no revenue loss occurred due to the misreporting.
Circular Clarifications:
Circular No. 192/04/2023-GST, dated July 17, 2023, clarifies that interest under Section 50(3) is chargeable only when the total ITC balance across all heads (IGST, CGST, SGST) falls below the amount of wrongly availed credit.
The Court highlighted that the total ITC balance in the Appellant’s ledger never fell below the wrongly availed amount.
Technical Error:
The Court classified the misreporting as a technical lapse devoid of fraudulent intent and, thus, not attracting penal provisions.
Key Takeaways
This judgment underscores that technical errors in ITC reporting, without intent to defraud or actual revenue loss, should not trigger punitive measures under Section 73 of the CGST Act.
Key Points from Circular No. 192/04/2023-GST:
- Interest under Section 50(3) applies only when the total ITC balance falls below the amount of wrongly availed credit.
- Misreporting ITC under different tax heads (e.g., IGST as CGST and SGST) does not automatically equate to wrongful availment unless utilized improperly.
- Rule 88B (as amended) specifies that interest applies only when ITC is wrongly utilized, defined as the total ITC balance falling below the misreported amount.
Rule 88B (3) Highlights:
- Wrongful ITC utilization occurs when the electronic credit ledger balance is insufficient.
- Interest calculation starts from the date of such utilization until the reversal or tax payment.
- The rule explicitly excludes cases where the ITC balance, taken as a whole, is sufficient to cover the wrongly availed credit.
Practical Examples
1. Example of Misreporting Without Revenue Loss: A taxpayer receives an inward supply attracting IGST worth ₹100,000 but mistakenly reports it as CGST (₹50,000) and SGST (₹50,000) in Form GSTR-3B. The total ITC balance in the electronic credit ledger remains sufficient to offset the claimed amount. Since no revenue loss occurs, this error is a technical lapse.
2. Example of Utilization Leading to Interest Liability: A taxpayer wrongly avails IGST credit of ₹100,000 but uses it to offset liabilities while the total ITC balance falls below ₹100,000. In this case, the wrongly utilized credit attracts interest from the date of utilization until reversal or tax payment.
3. Example of Correction Without Penalty: A taxpayer notices the misclassification of IGST as CGST/SGST during reconciliation and corrects the error in subsequent filings. As no wrongful utilization occurred, penalties under Section 73 are not applicable.
The Kerala High Court’s decision reinforces the need for a balanced approach to GST compliance, recognizing the challenges of procedural lapses. By distinguishing between technical errors and fraudulent actions, the judgment prevents undue hardships for taxpayers. This case serves as a guiding precedent for businesses and tax authorities, emphasizing the importance of intent and revenue implications in GST proceedings.
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