The Hon’ble Madras High Court in Greenstar Fertilizers Limited v. The Joint Commissioner (Appeals), [W.P.(MD) No.26254 of 2022 dated June 11, 2024], held that penalty cannot be demanded under Section 74 of the Central Goods and Services Act, 2017 (“the CGST Act”) where the assessee has not utilized the ineligible Input tax credit and the same is lying in the E-credit ledger.
Facts:
M/s. Greenstar Fertilizers Ltd. (“the Petitioner”) in the erstwhile tax regime was registered under the Central excise Act, who on implementation of GST transitioned various amounts as input tax credit vide Form TRAN-1 to the GST regime.
Some portion of transitioned credit was ineligible to the Petitioner, which it has not utilized for payment of tax in the GST regime (the same is underlying in the E-credit ledger).
The Revenue department issued the show cause notice, which was adjudicated by adjudicating authority who confirmed the demand of tax, interest and penalty of the ineligible credit lying in the e-credit ledger of the Petitioner.
Aggrieved by the order of the adjudicating authority the Petitioner field an appeal before the first appellate authority who vide its order modified the order passed by the adjudicating authority and upheld the imposition of penalty under Section 74 and quashed the rest demand of tax and interest.
Aggrieved by the imposition of penalty, the Petitioner approached the Hon’ble High Court contending that levy of penalty is unwarranted as the Petitioner has not utilized the input tax credit and further has reversed the same upon issuance of show cause notice.
Issue:
Whether the wrongly availed but not unutilized input tax credit lying in the E-credit ledger can be subject to penalty under Section 74 of the CGST Act?
Held:
The Hon’ble Madras High Court in W.P.(MD)No.26254 of 2022 held as under:
- Relied upon, the case of Aathi Hotel v. Assistant Commissioner (ST) (FAC), wherein the Hon’ble court has held that “where CENVAT credit has been taken and utilized wrongly, interest should be payable from the date the CENVAT credit has been utilized wrongly…. interest cannot be claimed simply for the reason that the CENVAT credit has been wrongly taken as such availment by itself does not create any liability of payment”
- Stated that, Section 74 of the CGST Act deals with a situation where the credit is availed or utilized by reason of fraud or any wilful misstatement or suppression of facts.
- Noted that, the observation of the Revenue department of levying penalty irrespective of the fact whether the credit was used/utilized or merely availed is not sustainable.
- Held that, imposition of penalty is unjustified and closed the petition.
- Imposed a token penalty of Rs. 10,000.
Conclusion: In conclusion, the Madras High Court’s decision provides clarity on the application of penalties under Section 74 of the CGST Act. It affirms that penalties should be linked to actual utilization of wrongly availed credits and not merely their availing. This judgment is pivotal for taxpayers navigating GST compliance, offering insights into legal interpretations and implications for future cases.
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