Penalty on ITC under GST availed but not utilized

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

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(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.