Facts of the Case:

In this case, the taxpayer was engaged in transportation and works contract services, had availed input tax credit (ITC) during FY 2017–18 from a supplier subsequently alleged to be a non-existent entity issuing fake invoices, based on an alert issued by the Directorate General of GST Intelligence (DGGI). Upon being intimated by the department, the petitioner voluntarily reversed the entire disputed ITC amounting to ₹4,39,970 through GSTR-3B returns prior to issuance of the show cause notice (SCN), and also informed the department accordingly. It was further contended that sufficient balance was available in the Electronic Credit Ledger at all material times.

Despite such reversal, the department issued SCN dated 26.07.2024 under Section 74 of the CGST Act alleging fraudulent availment of ITC in contravention of Section 16(2), and subsequently passed Order-in-Original confirming demand of tax equivalent to the reversed ITC, along with interest under Section 50 and penalty under Section 74. The petitioner challenged the said order before the High Court on grounds of absence of fraud, non-consideration of reply, mechanical invocation of Section 74 contrary to CBIC guidelines, and illegality of interest and penalty, particularly when ITC had already been reversed.

Issue:

Whether proceedings under Section 74 of the CGST Act can be validly invoked in the absence of fraud, wilful misstatement or suppression of facts, especially after expiry of limitation under Section 73? Whether interest under Section 50(3) is leviable where ITC has been voluntarily reversed prior to issuance of SCN and sufficient balance existed in the Electronic Credit Ledger? Whether demand of tax equivalent to already reversed ITC and imposition of penalty under Section 74 amounts to double taxation and is legally sustainable?

Held That:

The High Court held that invocation of Section 74 was wholly unsustainable in law, as the essential requirement of fraud, wilful misstatement or suppression of facts was not established. The adjudicating authority had acted mechanically based on a DGGI alert and third-party statements without conducting any independent inquiry or establishing the petitioner’s conscious involvement in any fraudulent activity. It was further observed that the proceedings were initiated nearly eight years after the relevant transactions, clearly beyond the limitation period prescribed under Section 73, and recourse to Section 74 was impermissibly taken to overcome such limitation.

On the issue of interest, the Court held that in light of Section 50(3), Rule 88B of the CGST Rules, and CBIC Circular dated 17.07.2023, interest is leviable only where ITC is both wrongly availed and utilised. In the present case, as the petitioner had reversed the disputed ITC prior to issuance of SCN and the Electronic Credit Ledger consistently maintained a balance exceeding the disputed amount, there was no utilisation of such ITC in the eyes of law. Accordingly, no interest liability arose.

With regard to tax demand and penalty, the Court held that once the ITC had already been voluntarily reversed, raising a demand of the same amount without giving due credit amounted to double taxation, which is impermissible. Since the net tax effect was nil, imposition of penalty under Section 74 was held to be arbitrary and without jurisdiction. The Court further noted that penalty cannot be imposed mechanically in the absence of tax liability and fraudulent intent.

Accordingly, the impugned Order-in-Original was quashed, and the writ petitions were allowed, holding that initiation of proceedings under Section 74, levy of interest under Section 50, and imposition of penalty were all unsustainable in law.

Case Name: M/s. Manoja Kumar Nayak and M/s. Babamani Roadways & Borewells Versus Commissioner Goods and Services Tax and Central Excise, Rourkela, Additional Commissioner Goods and Services Tax and Central Excise Rourkela, Superintendent, Anti-Evasion Goods and Services Tax and Central Excise Rourkela Commissionerate, Assistant Commissioner, Goods and Services Tax and Central Excise, Angul, Superintendent Goods and Services Tax and Central Excise, Angul. dated 08.04.2026

To read the complete judgement 2026 Taxo.online 887