I) Introduction

Recently, section 50 of the CGST Act was amended retrospectively from 1.7.2017 to provide that interest will be charged on ITC wrongly availed and utilized. Prior to the amendment, interest was chargeable on ITC wrongly availed or utilized. Thus, interest was chargeable on ITC wrongly availed but not utilized. Post amendment, the interest is chargeable only on ITC wrongly availed and utilized. Interest is not chargeable on ITC wrongly availed but not utilized. However, when it comes to penalty on ITC wrongly availed, section 122 remains the same as before – that is penalty is leviable on “ITC wrongly availed or utilized”. Thus implying that penalty is chargeable on ITC wrongly availed but not utilized also.

II) Provisions of sec 122

Relevant portion is reproduced below:

122. Penalty for certain offences


(2) Any registered person who supplies any goods or services or both on which any tax has not been paid or short-paid or erroneously refunded, or where the input tax credit has been wrongly availed or utilised,—

(a) for any reason, other than the reason of fraud or any wilful misstatement or suppression of facts to evade tax, shall be liable to a penalty of ten thousand rupees or ten per cent. of the tax due from such person, whichever is higher;

(b) for reason of fraud or any wilful misstatement or suppression of facts to evade tax, shall be liable to a penalty equal to ten thousand rupees or the tax due from such person, whichever is higher.

Thus, it can be observed from the above that penalty is payable if ITC is wrongly availed or utilized. Thus, even if ITC is wrongly availed but not utilized, penalty of 10% or 100% as the case may be. Usually, the Dept. seeks to allege that there was malafide intention to evade tax and therefore, seeks to levy higher penalty of 100%. Since section 50 is amended but section 122 is not amended, it seems that penalty for wrong availment but not utilization can still be levied.

III) Reasons in support of the interpretation that penalty is payable.

1. Supreme Court in case of Pratibha Processors brough out the difference between tax, interest and penalty. Interest is compensatory in character. It is for withholding payment of tax. Whereas penalty is different from interest. It is penal in nature. It is levied for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. In case of ITC wrongly availed but not utilized, there is no withholding of tax, therefore interest cannot be charged. However, since there is wrongful availment, there is violation of the provisions of the Act and therefore, penalty can be levied. Of course, the question of whether the violation is deliberate or innocent remains. But that is taken care of by sub clause a and b. 10% and 100% penalties are prescribed for innocent and deliberate violations respectively.

2. In the earlier regime also, Rule 14 of Cenvat Credit Rules previously employed the words “cenvat credit wrongly availed or utilized”. Later in year 2012, the same was amended to “cenvat credit wrongly availed and utilized”. And interest was thus payable only on cenvat wrongly availed and utilized. Interest was not payable on cenvat wrongly availed but not utilized. However, when Rule 14 was amended in year 2012, corresponding amendment was not made in Rule 15 dealing with penalty. That Rule still has the wording “cenvat credit wrongly availed or utilized.” This implies that in the previous regime also, whereas no interest was payable on cenvat (ITC) wrongly availed but not utilized, penalty was still payable u/r 15. In view of the same, in GST also, even when section 50 is amended, sec 122 is not amended. Thus, penalty is still payable on ITC availed but not utilized.

3. If it is argued that clause a and b use the words “tax due from such person” and do not use any additional words like “input tax credit wrongly availed or utilized”, and therefore, penalty is not applicable, then the words , “or where the input tax credit has been wrongly availed or utilised”  in sub section 2 become redundant, which cannot be correct. Therefore, penalty is payable.

IV) Decision of Hon. Madras HC in case of Aathi Hotel

Hon. Madras High Court in case of M/s Aathi Hotel, held that interest was not payable on ITC availed but not utilized. It also held that penalty was also not payable. However, two points are worth noting in this regard :

1. The HC observed that penalty should have been imposed by invoking section 122 in this case, which was not invoked. Penalty was imposed u/s 74. Had section 122 been invoked, perhaps, the result would have been different?

2. The Hon. HC did impose a token penalty of Rs. 10,000/- for wrongly availing the ITC even though the same was not utilized.

Considering the above, it seems that this decision will not be a bar for imposing penalty u/s 122 (2) for wrong availment of ITC even if the same is not utilized.

V) Possible cases of litigation

In some cases, where the taxpayer is doubtful of eligibility of ITC, he may decide to avail the ITC but not to utilize it. Eg in case of reality leasing business, the ineligibility of ITC on building is pending before Hon. SC in case of M/s Safari Retreats. In such cases, the taxpayer may choose to avail ITC but not to utilize it. If there is favourable decision, he will utilize it, if there is adverse decision, he will reverse it. Or for some inadvertent wrong availments which may be reversed by the assessee on his own, but these are detected in audit, penalty may be imposed.

VI) Conclusion

It is desirable that Govt. clarifies this issue and if the intention of the Govt. is not to levy penalty on ITC availed but not utilized, then an amendment in sec 122 (2) be made on the lines of sec 50. That is, for the words “input tax credit has been wrongly availed or utilised”, the words “input tax credit has been wrongly availed and utilised” be substituted. Otherwise, this will give rise to avoidable litigation.

Author Bio

Qualification: LL.B / Advocate
Company: N/A
Location: Kolhapur, Maharashtra, India
Member Since: 30 Sep 2019 | Total Posts: 6
Kuldeep Kulkarni is an indirect tax professional with 22 years experience. Provides consulting and litigation services in indirect tax matters like GST, Customs, Foreign Trade (DGFT), erstwhile Central Excise, Service Tax and VAT. He also is a speaker for GST at various seminars organized by tra View Full Profile

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    Yes. You are right that the provisions of Section 122(2) can be invoked for imposition of penalty in case where ITC has been wrongly availed or utilised.

    However, I have certain query-

    “Though under Sections 73(1) and 74(1) of the Act, proceedings can be initiated for mere wrong availing of Input Tax Credit followed by imposition of interest penalty either under Section 73 or under Section 74 they stand attracted only where such credit was not only availed but also utilised for discharging the tax liability.”

    Before amendment to Section 50, Interest was payable for wrong availment or utilisation of ITC. After amendment, Interest can be charged only if ITC is wrongly availed and utilised. However, it appears that there is no such condition for Penalty. It appears that Penalty can be imposed, even in those cases, where ITC is wrongly availed but not utilised, under Section 73 and 74.

    So, what is the basis for the above ruling in the case of AATHI HOTEL, as regards imposition of penalty under Section 73 or 74 is concerned. Moreover, in the said case, it is noteworthy that Section 74 was not found invokable in the said case.

    The above discussion becomes relevant as it could be noticed that we can draw parallel to the provision of Section 122(2) with the provisions of Sections 73(1) r/w Sec 73(9) and Sec 74(1) r/w other sub-sections. Further, clause(ii) to the Explanation to both the Sections lays down if proceedings have been concluded under Section 73 or 74, proceedings under Section 122 also stands concluded.

    Section 122 has to be read along with Section 73 and 74. If Section 122 is held applicable in all cases of ITC wrong availment then the provisions of Section 73(6), 73(8), 74(5), 74(6), 74(7)… gets redundant.

    Since inception of GST, I have been wondering what is the need for Section 122(2) when criteria laid therein is already covered under Section 73 and 74. Moreover, Section 122(2) is not starting with- “Notwithstanding anything contained in Section 73 and 74…”

    Thus, it appears that Section 73 and 74 can also be invoked in cases where ITC has only been wrongly availed or utilised. Similarly, it appears that Section 122(2) can also be invoked, however, penalty under Sec 122(2) cannot be imposed if penalty is imposed under Section 73/ 74.

  2. OM PRAKASH JAIN says:

    Thanks a lot for giving your opinion. My main emphasis is on ‘Notwithstanding’ clause in S.16(2), which supersedes S.16(4) : Skill Lotto Solutions Pvt. Ltd. v. Union of India (2021) 35 J.K.Jain’s GST & VR 167 (SC), Government of Kerala v. Mother Superior Adoration Convent(2021) 35 J.K.Jain’s GST & VR 402 (SC).
    The SLP filed by the Revenue has already been dismissed by the Supreme court on 29.6.2021 on account of delay with cost : (2021) 36 J.K.Jain’s GST & VR 31.
    CA Om Prakash Jain s/o J.K.Jain, Jaipur Tel 9414300730

  3. Om Prakash Jain says:

    What is meaning of the term ‘ITC wrongly availed’, which has not been defined in the Act. Whether late filing of return after the due date by paying Late Fee & availing ITC u/s 16(2), will tantamount to ‘ITC wrongly availed’ If yes, then why? Recently, in the case of India Yamaha Motor Pvt. Ltd. v. Assistant Commissioner & Ors. (Mad) (2022) 38 J.K.Jain’s GST & VR 213 , the HC Madras held that Interest is leviable despite the availability of credit in electronic cash/credit ledger in case GSTR-3B if\s filed after due date. Whether the judgment lays down correct Ratio decidendi.
    CA Om Prakash Jain s/o J.K.Jain, Jaipur
    Tel 9414300730

    1. Kuldeep Kulkarni says:

      1. ITC wrongly availed would mean ITC availed in contravention of any legal provisions including those of rules and notifications. ITC which the taxpayer was not entitled to and still he availed it.

      2. Late filing of return (3B) and availing ITC therein in itself cannot make the ITC “wrongly availed”. Because, timely filing of return (3B) is not a condition for availing ITC. Sec 16(2)(d) only requires filing of the return u/s 39 i. e. 3B. It does not require timely filing for ITC entitlement. However, if the return is filed beyond the time limit allowed for availing ITC u/s 16(4), then the ITC shall be treated as wrongly availed. Because, the same cannot be availed. Of course, interpretation and judicial scrutiny of sec 16(4) is in progress before various courts.

      3. Yamaha India – Now with the amendment of sec 50, interest is charged only on liability discharged by cash. No interest on liability discharged by credit (ITC balance). As regards balance in cash ledger, Gujrat HC in Vishnu Aroma case had given opposite verdict. However, in that case the assessee was unable to file 3B because of system problem. But essential facts were the same. This needs to be judicially settled at SC level. Till then we should play safe.

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