Facts of the Case:

In this case, the petitioner was engaged in the business of trading in ferrous waste and scrap and regularly procured scrap from Indian Railways. Under the GST framework, such purchases attracted tax liability under the reverse charge mechanism (RCM), requiring the petitioner to discharge GST directly.

During an audit conducted for the financial years 2017–18 and 2018–19, it was noticed that although the petitioner had deposited the applicable GST amounts in cash into the electronic ledger, he had failed to debit such amounts for appropriation to the Government account. Despite such non-appropriation, the petitioner had availed input tax credit (ITC) corresponding to these amounts. Upon detection during audit, the petitioner subsequently made the necessary debit entries and appropriated the tax to the Government.

The department initiated proceedings under Section 74 of the CGST Act, alleging non-payment of tax, wrongful availment of ITC, suppression of facts, and wilful misstatement. The adjudicating authority confirmed substantial tax demand (already deposited but not appropriated earlier), interest for delayed payment, and penalty equivalent to tax under Section 74, along with recovery of ITC and additional penalties.

Aggrieved by the order, the petitioner approached the High Court contending that the tax liability had been discharged through timely deposit, that failure to debit the ledger was a procedural lapse arising from misunderstanding of the new GST system, and that the essential ingredients of fraud or suppression required for invoking Section 74 were absent.

Issue: Whether mere deposit of tax into the electronic ledger constitutes valid payment under GST law; whether ITC can be availed without actual appropriation of tax to the Government. Also, Whether the petitioner’s conduct amounts to fraud, wilful misstatement, or suppression so as to attract Section 74; whether recovery of ITC was justified when tax was subsequently paid.

Held That: The Court held that under the GST scheme, mere deposit of amounts into the electronic ledger does not amount to discharge of tax liability. In terms of Section 49 of the CGST Act read with the relevant rules, tax is deemed to be paid only when the amount is debited from the electronic ledger and credited to the Government account. Accordingly, the petitioner’s initial failure to debit the ledger meant that tax was not legally paid at that stage. However, since the petitioner subsequently made the necessary debit entries and appropriated the tax, the liability stood discharged, albeit belatedly, thereby attracting liability to pay interest for the period of delay.

Further, on the question of input tax credit, the Court observed that ITC can be availed only upon actual payment of tax to the Government. Therefore, the petitioner’s availment of ITC prior to such appropriation was irregular. Nevertheless, once the tax was duly appropriated at a later stage, the basis for recovery of ITC ceased to exist, and separate recovery of such ITC was not justified.

With respect to the invocation of Section 74, the Court emphasized that the existence of fraud, wilful misstatement, or suppression of facts is a question of fact that must be determined on proper appreciation of evidence. The adjudicating authority had failed to adequately examine whether the petitioner’s omission was deliberate or merely inadvertent due to ignorance of procedural requirements under the new GST regime. Consequently, the invocation of penal provisions under Section 74 could not be sustained without such factual determination.

Case Name: Sona Enterprises, Prop. Shafi Mohmad Versus The State of Ap, Rep By Its Principal Secretary, State Tax Amaravati, Additional Commissioner, Office of Principal Commissioner of Central Tax Visakhapatnam. dated 27.04.2026

To read the complete judgement 2026 Taxo.online 1106