Voluntary GST Payments Under Section 73(5) Cannot Be Treated as Compliance

Dharmendra Singh Vs Deputy Commissioner of Revenue (Calcutta High Court)

The Calcutta High Court has set aside a tax demand and a subsequent appellate order, remanding the matter back to the proper officer for a fresh adjudication. The court’s decision came in a writ petition filed by Dharmendra Singh, who challenged the tax department’s handling of a GST show cause notice and a voluntary payment made by him. The court ruled that the department erred by treating a voluntary payment made under one section of the GST Act as a response to a show cause notice issued under a different, more stringent section.

The petitioner, a registered taxpayer, had availed and utilized Input Tax Credit (ITC) from transactions with another firm. When the other firm’s registration was later cancelled, the tax authorities initiated a proceeding against the petitioner under Section 74 of the GST Act, alleging fraudulent transactions. A show cause notice was issued on March 21, 2022, following an initial intimation of discrepancies on January 5, 2022.

However, even before the formal proceedings could conclude, the petitioner voluntarily made a partial payment of the disputed amount, specifically noting that the payment was being made under Section 73(5) of the Act. This section pertains to voluntary payments made in cases where there is no intent to defraud. The petitioner made these payments on March 24, 2022, and May 27, 2022.

Despite these payments and without any formal response from the petitioner to the show cause notice, the proper officer proceeded to pass an order on February 17, 2023. The officer, assuming the transactions were fictitious, determined the balance tax, interest, and penalty payable. Crucially, the officer treated the petitioner’s voluntary payment under Section 73(5) as compliance with the show cause notice issued under Section 74, which deals with cases of fraud and willful misstatement.

The court found this approach to be a significant error. It highlighted that the department had failed to seek any explanation from the petitioner regarding the payment under Section 73(5), thereby misinterpreting the petitioner’s actions. Compounding the procedural irregularities, the department proceeded to recover the entire tax demand from the petitioner’s Electronic Credit Ledger on April 14 and May 16, 2023, even before the statutory period for filing an appeal had expired.

The petitioner’s subsequent appeal, filed on January 6, 2024, was dismissed by the appellate authority on the grounds of delay. With the Appellate Tribunal not yet constituted, the petitioner was compelled to approach the High Court.

In its ruling, the Calcutta High Court concluded that the matter was required to be remanded back to the proper officer. The court set aside both the original order and the appellate order and granted the petitioner two weeks to respond to the show cause notice. The proper officer was then directed to pass a fresh, legally sound order after considering the petitioner’s response. No specific judicial precedents were cited in the judgment.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

1. Challenging the order dated 23^rdFebruary 2024 passed by the appellate authority under Section 107 of the WBGST /CGST Act, 2017 (hereinafter referred to as the “said Act”) dismissing the appeal on the ground of delay, the instant writ petition has been filed.

2. The petitioner’s case proceeds on the premise that the petitioner is a registered tax payer and in usual course of business dealings and transactions had transacted with one Balaji Trading Co. and had availed and utilized ITC in respect of the transactions that he did with Balaji Trading Co. between June 2019 and November 2019. Later, the registration of Balaji Trading CO. Ltd. which is a proprietorship firm of Asha Sen having been cancelled under the provisions of Section 29(2)(e) of the said Act, a proceeding under Section 74 of the said Act was initiated by issuing a show cause notice dated 21^stMarch 2022. Even prior to issuance of the show cause notice, a notice in form GST DRC 01- was issued on 5^th January 2022 notifying the petitioner of the discrepancies.

3. Records would reveal that the petitioner had voluntarily made part payment of the demand made in form GST DRC – 01A by claiming such payment be treated as payment made under Section 73(5) of the said Act. Such payments were made on 24^thMarch 2022 and 27^th May 2022 in form DRC-03.

4. Records reveal that, the petitioner did not respond to the show cause and also did not personally appear before the proper officer on 4^thApril 2022, being the date fixed for personal hearing. Records would also reveal that the proper officer by proceeding on the premise that the petitioner had taken advantage of certain fictitious transactions and on the basis thereof, had availed and utilized ITC and also having partially complied with the notice in Form GST DRC – 01, proceeded to hold that the petitioner is liable to make payment of the balance amount and had accordingly determined the balance tax component, interest component and the penalty payable by the petitioner vide his order dated 17^th February, 2024.

5. In furtherance to the above, the respondents had recovered the entire tax from the petitioner’s Electronic Credit Ledger under the heading “outstanding demand” partly on 14^thApril 2023 and the balance on 16^th May 2023, i.e., even before the expiry of three months from the date of passing of the order. The petitioner had since preferred and appeal. Such appeal had also been turned down on the ground of delay.

6. The learned advocates for the parties have since advanced arguments. From the documents on record, it would transpire that the petitioner had made voluntary payment under the provisions of Section 73(5) of the said Act. Although, the proceeding was not contested by the petitioner, however, the proper officer had treated the aforesaid payment to be the payment made in compliance with the show cause notice, though the record would speak otherwise. In my view, ordinarily in such circumstances, having regard to the payment being made voluntarily under Section 73(5) of the said Act, an explanation ought to have been sought for from the petitioner in this regard. None could enlighten the Court as regards and further explanation being sought for from the petitioner. Further even before the statutory period for preferring the appeal had expired, a part of the outstanding demand had been recovered on 14^thApril 2023 and the balance had been recovered on 16^th May 2023. The appeal filed by the petitioner on 6^th January 2024 was also rejected on the ground that there is no scope to accept the appeal beyond the prescribed period provided for.

7. Ordinarily, the petitioner could have assailed the said order by preferring a further appeal before the appellate tribunal. But since the appellate tribunal is yet to be constituted, the petitioner has approached this Court. Having regard to the peculiar facts narrated above and by noting that the entire amount of tax has ready been recovered from the petitioner, I am of the view that the matter is required to be remanded back to the proper officer for providing an opportunity to the petitioner to explain the circumstances under which the payment was made voluntarily under Section 73(5) of the said Act.

8. In view thereof, while setting aside the orders dated 23^rdFebruary 2024 and 17^th February 2023, I remand the matter back to the proper officer for an adjudication on merits. The petitioner shall be at liberty to respond to the show cause notice within two weeks from date. It is made clear that if no response is filed by the petitioner within the aforesaid period, the proper officer shall decide the case in accordance with law without the petitioner’s response.

9. With the above observations and directions, the writ petition is disposed of.

10. All parties shall act on the basis of the server copy of this order duly downloaded from this Court’s official website.