INPUT TAX CREDIT NOT ALLOWABLE FOR PURCHASING DEALER IF SELLING DEALER FAILS TO PAY TAX GOVERNMENT

INPUT TAX CREDIT NOT ALLOWABLE FOR PURCHASING DEALER IF SELLING DEALER FAILS TO PAY TAX GOVERNMENT

IN THE HIGH COURT OF JUDICATURE AT ALLAHABAD

Clear Secured Services Private Limited
Vs
Commissioner, State Tax GST, U.P. Commercial Tax,
Lucknow and Another
Appeal Number: Writ Tax No. – 5 of 2023
Writ TAX No. – 1 of 2023
Date of Judgement/Order: 23/11/2023

BRIEF FACTS:

1. The petitioner is a private company limited and is providing manpower supply services. The petitioner was served with a show-cause notice dated 27.05.2021 contained in Annexure – P1, whereby allegations were levelled against the petitioner alleging that although the petitioner had collected the GST but the same was not paid within the time prescribed and thus, the petitioner was liable for payment of penalty in terms of the mandate of Section 122(1)(iii) of the GST Act (hereinafter referred to as ‘the Act’). The quantum of penalty was specified in the show-cause notice. The petitioner could not give a reply on account of Covid – 19 situation prevalent and in the absence of such a reply, an order came to be passed against the petitioner which was ex-parte. In terms of the said order passed against the petitioner, a penalty of the amount as indicated in the show-cause notice was imposed. The amount imposed was Rs.28,00,476.36/- towards CGST and a similar amount towards SGST, as such, the total amount of penalty imposed against the petitioner was Rs.56,00,952.72/-.
2. Aggrieved against the said order, the petitioner preferred an appeal. The Appellate Authority dismissed the appeal by means of an order dated 14.09.2022. While dismissing the appeal, the Appellate Authority recorded the submission of the petitioner to the effect that the amount could not be deposited within the time frame as the amounts were not received within time owing to the Covid – 19 situation and in any case, the said amounts were paid along with late fee after the expiry of three months’ time and thus no case for levy of penalty was made out. The ground with regard to not giving an opportunity of hearing was also taken. The Appellate Authority after recording the submission upheld the imposition on penalty and dismissed the appeal by placing reliance on the mandate of Section 122(1)(iii) of the Act.
3. A counter affidavit has been filed by the State justifying the orders imposing penalty again on the strength of the mandate of Section 122(1)(iii) of the Act. In the counter affidavit filed by the respondents, it has been reiterated that in terms of the GSTR – 1 filed by the petitioner, the petitioner did not pay the amount for a period of three months. It is also taken as a defense that the petitioner not only failed to deposit the GST collected by him within the time limit but also failed to provide any justification in not depositing the tax amount so collected within the time limit, and again placing reliance on the mandate of Section 122(1)(iii) of the Act, the penalty imposed against the petitioner is sought to be justified.

Section 123: Penalty for failure to furnish information return

If a person who is required to furnish an information return under section 150 fails to do so within the period specified in the notice issued under sub-section (3) thereof, the proper officer may direct that such person shall be liable to pay a penalty of one hundred rupees for each day of the period during which the failure to furnish such return continues:
Provided that the penalty imposed under this section shall not exceed five thousand rupees.

Section 126: General disciplines related to penalty

1. No officer under this Act shall impose any penalty for minor breaches of tax regulations or procedural requirements and in particular, any omission or mistake in documentation which is easily rectifiable and made without fraudulent intent or gross negligence. Explanation. – For the purpose of this sub-section, –
   (a) a breach shall be considered a ‘minor breach’ if the amount of tax involved is less than five thousand rupees;
   (b) an omission or mistake in documentation shall be considered to be easily rectifiable if the same is an error apparent on the face of record.
2. The penalty imposed under this Act shall depend on the facts and circumstances of each case and shall be commensurate with the degree and severity of the breach.
3. No penalty shall be imposed on any person without giving him an opportunity of being heard.
4. The officer under this Act shall while imposing penalty in an order for a breach of any law, regulation or procedural requirement, specify the nature of the breach and the applicable law, regulation or procedure under which the amount of penalty for the breach has been specified.
5. When a person voluntarily discloses to an officer under this Act the circumstances of a breach of the tax law, regulation or procedural requirement prior to the discovery of the breach by the officer under this Act, the proper officer may consider this fact as a mitigating factor when quantifying a penalty for that person.
6. The provisions of this section shall not apply in such cases where the penalty specified under this Act is either a fixed sum or expressed as a fixed percentage.

Section 127. Power to impose penalty in certain cases

Where the proper officer is of the view that a person is liable to a penalty and the same is not covered under any proceedings under section 62 or section 63 or section 64 or section 73 or section 74 or section 129 or section 130, he may issue an order levying such penalty after giving a reasonable opportunity of being heard to such person.

Section 128: Power to waive penalty or fee or both

The Government may, by notification, waive in part or full, any penalty referred to in section 122 or section 123 or section 125 or any late fee referred to in section 47 for such class of taxpayers and under such mitigating circumstances as may be specified therein on the recommendations of the Council.

In the present case, in terms of the Notification dated 01.06.2021, the Government in exercise of its powers under Section 128 of the Act had issued guidelines waiving the late fee for filing the returns, this factor had to be validly considered while imposing the penalty in terms of mandate of Section 126(2) of the Act. In the facts of case, the maximum penalty imposable was Rs.10,000/- or the tax evaded, whichever was more; there being no allegation of tax evasion, the maximum penalty that could have been imposed was Rs.10,000/- which could even be lower than the said
amount if the Taxing Authority as well as the Assessing Authority had considered the mandate of Section 126(2) of the Act read with Notification dated 01.06.2021. The said exercise clearly has not been done.

Court’s Observations:

The court noted that the only allegation against the petitioner was a delay in payment, not tax evasion. Referring to Section 126(2) of GST Act, it emphasized the need for penalties to be commensurate with the severity of the breach.

Decision:

In light of the submissions and the petitioner’s offer to settle for a penalty of Rupees 10,000/-, the court set aside the orders dated 25.08.2021 and 14.09.2022. The petitioner was directed to pay a reduced penalty of Rupees. 10,000 within two weeks.