2025 (6) TMI 1571 - HC - GST

Challenge to order under Section 74 of HP GST Act 2017 - wrongful availment of Input Tax Credit (ITC) - amount deposited by the petitioner under protest can be treated as an admission of liability thereby justifying imposition of interest and penalty or not - HELD THAT - Once the petitioner had deposited the amount under protest the same could not have been considered to be an admission of liability because the necessary corollary of deposit under protest is that the amount towards the alleged liability has been deposited without admitting the liability and inherent therein is his right to challenge the order. Under protest has been defined in Black s Law Dictionary Tenth Edition Page 1419 as 3. A formal statement usu. in writing disputing a debt s legality or validity but agreeing to make payment while reserving the right to recover the amount at a later time. The disputed debt is described as under protest . 4. Tax. A taxpayer s statement to the collecting officer that payment is being made unwillingly because the taxpayer believes the tax to be invalid. The order under Section 74 of the HP GST Act 2017 dated 02.12.2023 charging interest of Rs. 1, 32, 34, 923/- and levying penalty of Rs. 1, 11, 45, 134/- are quashed and set aside. Further respondent No. 4 is directed to issue fresh DRC-07 incorporating only the disputed amount of tax of Rs. 1, 11, 45, 134/- on account of alleged wrong availment of Input Tax Credit (ITC) so as to enable the petitioner to agitate the same by filing an appeal before the Appellant authority. Petition allowed.

Summary

The core legal questions considered by the Court in this matter are:

1. Whether the order passed under Section 74 of the HP GST Act, 2017, charging interest and levying penalty on the petitioner for alleged wrongful availment of Input Tax Credit (ITC) without determining the actual tax demand, is valid and sustainable.

2. Whether the amount deposited by the petitioner 'under protest' can be treated as an admission of liability, thereby justifying imposition of interest and penalty.

3. Whether the adjudicating authority was justified in passing the impugned order without conducting an independent inquiry or investigation into the alleged wrongful availment of ITC.

4. Whether the petitioner was denied the opportunity to challenge the basic tax demand in the appellate proceedings due to procedural restrictions imposed by the tax portal.

5. Whether the respondent was obligated to rectify the order under Section 161 of the HP GST Act, 2017, to enable the petitioner to file a proper appeal against the tax demand.

Issue 1: Validity of the Order under Section 74 of the HP GST Act, 2017

The legal framework governing this issue is Section 74 of the HP GST Act, which deals with determination of tax not paid or short paid or ITC wrongly availed or utilized by reason of fraud or willful misstatement or suppression of facts. The section empowers the tax authority to levy interest and penalty upon establishing such default.

The Court noted that the impugned order levied interest of Rs. 1,32,34,923/- and penalty of Rs. 1,11,45,134/- without determining the actual tax demand on account of disallowance of ITC. The order was passed treating the amount deposited under protest as an admitted liability, which the Court found to be a fundamental error.

The Court emphasized that the authority failed to conduct an independent investigation or inquiry into the alleged wrongful availment of ITC, relying solely on the audit memo and show cause notice. The absence of a detailed inquiry and reliance on suspicion without corroborative evidence was held to be legally impermissible.

In application of law to facts, the Court observed that the petitioner had submitted detailed replies, reconciliations, affidavits from transporters verifying the supply chain, and had cooperated with the audit process. Despite this, the authority proceeded to levy interest and penalty summarily.

The competing argument from the respondents was that the audit and subsequent notices sufficed as grounds for the order. The Court rejected this, holding that suspicion alone cannot justify such penal consequences.

The conclusion was that the impugned order under Section 74 was perverse and unsustainable.

Issue 2: Treatment of Amount Deposited 'Under Protest'

The Court examined the legal significance of payment 'under protest.' Reliance was placed on the definition from Black's Law Dictionary, which defines payment under protest as a formal statement disputing the legality or validity of a debt while making payment, reserving the right to recover the amount later.

The Court held that such payment does not amount to admission of liability. Therefore, the tax authority erred in treating the amount deposited by the petitioner under protest as an admitted tax liability, which formed the basis for levying interest and penalty.

This principle was applied to invalidate the impugned order's approach.

Issue 3: Requirement of Independent Inquiry Before Disallowing ITC

The Court underscored the necessity of an impartial and independent inquiry before disallowing ITC and imposing penalties. It found that the adjudicating authority failed to fulfill this requirement, relying on audit observations and summary show cause notices without further investigation.

The petitioner had provided extensive documentation and affidavits supporting the genuineness of the ITC claimed. The Court found that the authority's failure to consider these and conduct an inquiry was a violation of principles of natural justice and statutory mandate.

Issue 4: Procedural Hindrance in Filing Appeal Against Tax Demand

The petitioner was able to file an appeal only against the interest and penalty, as the tax portal did not allow challenging the principal tax demand, which had been deposited under protest. This procedural issue effectively denied the petitioner the right to challenge the core demand.

The Court recognized this procedural anomaly and noted that it compelled the petitioner to file a rectification application under Section 161 to seek correction of the order to permit a proper appeal.

Issue 5: Obligation to Rectify Order Under Section 161

The petitioner's application for rectification was refused by the respondent on the ground that there was no mismatch between the show cause notice and the order. The Court found this refusal to be unjustified as the petitioner's fundamental grievance regarding the creation of tax liability and the right to appeal was not addressed.

The Court directed the issuance of a fresh DRC-07 incorporating only the disputed tax amount to enable the petitioner to file an appeal and agitate the matter properly.

Significant Holdings

"Once the petitioner had deposited the amount 'under protest', the same could not have been considered to be an admission of liability because the necessary corollary of deposit under protest is that the amount towards the alleged liability has been deposited without admitting the liability and inherent therein is his right to challenge the order."

"Input Tax Credit to the tune of Rs. 1,11,45,134/- could not have been reversed, merely on the basis of the suspicion without carrying out any independent investigation coupled with other evidence."

"The manner in which respondent No. 4 has acted in this case cannot be countenanced and leaves a lot to be desired."

"The order under Section 74 of the HP GST Act, 2017, dated 02.12.2023, charging interest of Rs. 1,32,34,923/- and levying penalty of Rs. 1,11,45,134/- are quashed and set aside."

"Respondent No. 4 is directed to issue fresh DRC-07 incorporating only the disputed amount of tax of Rs. 1,11,45,134/- on account of alleged wrong availment of Input Tax Credit (ITC), so as to enable the petitioner to agitate the same by filing an appeal before the Appellate authority."

The Court established the principle that payment under protest is not an admission of liability and that tax authorities must conduct independent and impartial inquiries before disallowing ITC and imposing penalties. The Court also emphasized the right of the taxpayer to challenge the tax demand through proper appellate mechanisms and held that procedural barriers preventing such challenge are impermissible.