GST: No Penalty Under Section 74 After Voluntary ITC Reversal due to non-existent supplier, says High Court

The dispute began when the Anti-Evasion wing alleged that the petitioners had claimed input tax credit (ITC) based on invoices issued by a non-existent supplier. On receiving this communication, the petitioners acted without delay and voluntarily reversed the entire ITC in their GSTR-3B returns, even before any Show Cause Notice was issued. They also informed the department and showed that their electronic credit ledger had a sufficient balance, more than the disputed ITC. Despite this, the department issued a Show Cause Notice under Section 74, alleging fraudulent ITC availment. The adjudicating authority passed an Order-in-Original confirming the demand, levying interest under Section 50, and imposing a 100% penalty—without any independent verification of the petitioners’ conduct. Challenging this approach, the petitioners approached the High Court.

Issue Raised: Whether Section 74 can be invoked solely on the basis of a DGGI Alert Notice without establishing fraud or intent to evade tax and Whether interest under Section 50 is payable when ITC is voluntarily reversed and there is sufficient balance in the electronic credit ledger?

HC Held: The High Court ruled in favour of the petitioners and set aside both the Show Cause Notice and the Order-in-Original. It held that Section 74 cannot be invoked mechanically; there must be clear evidence of fraud or intent to evade tax. Mere reliance on a DGGI Alert Notice is not enough. On interest, the Court clarified that liability arises only when wrongly availed ITC is actually utilised. Since the ITC was reversed and sufficient balance was maintained, no interest was payable. The Court also noted that demanding the same amount again, after reversal, effectively results in double taxation. In such a situation, imposing a 100% penalty was held to be unjustified.

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