In a significant judgment, the Orissa High Court has clarified the legal position regarding the imposition of penalty and interest under the Central Goods and Services Tax Act, 2017 (CGST Act) when input tax credit (ITC) is voluntarily reversed by a taxpayer. The Court quashed the Order-in-Original and related proceedings initiated under Section 74 of the CGST Act against the petitioner, holding that such proceedings were unsustainable in the absence of evidence of fraud, wilful misstatement, or suppression of facts to evade tax.
The case arose from proceedings initiated by the GST and Central Excise authorities against the petitioner for availing ITC on the basis of invoices issued by a supplier later found to be non-existent. The authorities alleged that the petitioner had fraudulently availed ITC and, accordingly, issued show cause notices and passed orders demanding tax, interest under Section 50, and penalty under Section 74. The petitioner, however, had already reversed the disputed ITC in subsequent returns prior to the issuance of the show cause notice and maintained a surplus balance in the electronic credit ledger throughout the relevant period.
The Court examined the statutory framework under Sections 73 and 74 of the CGST Act, emphasizing that Section 74 can only be invoked where there is material evidence of fraud, wilful misstatement, or suppression of facts with intent to evade tax. The Court found that the authorities had mechanically invoked Section 74 based solely on an alert notice regarding the supplier, without conducting any independent inquiry or establishing the petitioner’s complicity or intent to defraud the revenue. The Court further noted that the petitioner had acted bona fide by reversing the ITC upon being notified of the supplier’s status, and there was no material to suggest fraudulent intent.
On the issue of interest under Section 50, the Court relied on the retrospective amendment to Section 50(3) and Rule 88B of the CGST Rules, as well as the clarifications issued by the Central Board of Indirect Taxes and Customs (CBIC). It held that interest is chargeable only when wrongly availed ITC is also utilised, and that utilisation is deemed only if the electronic credit ledger balance falls below the amount of wrongly availed ITC. Since the petitioner maintained a surplus balance at all times, no interest liability arose.
Regarding penalty, the Court held that imposition of penalty under Section 74 is not a mechanical exercise and cannot be sustained in the absence of tax liability or evidence of fraud. The Court also observed that demanding tax equivalent to the amount of ITC already reversed would amount to double taxation, which is impermissible in law.
In conclusion, the Orissa High Court allowed the writ petitions, quashed the impugned orders, and held that the initiation of proceedings under Section 74, as well as the imposition of interest and penalty, were arbitrary and without authority of law in the facts of the case. The judgment reinforces the principle that mere reversal of ITC, in the absence of fraudulent intent and with sufficient ledger balance, does not attract penalty or interest under the GST regime.
Case Reported at:
Case Name: Manoja Kumar Nayak v. Commissioner Goods and Services Tax and Central Excise and Ors.
Case Citation: (2026) taxcode.in 828 HC
