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Home Articles Goods and Services Tax - GST CA Bimal Jain Experts This

No interest and penalty to be imposed if credit is merely availed but not utilised.

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No interest and penalty to be imposed if credit is merely availed but not utilised.
CA Bimal Jain By: CA Bimal Jain
June 11, 2022
All Articles by: CA Bimal Jain       View Profile
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The Hon’ble Madras High Court in Aathi Hotel v. Assistant Commissioner (ST) (FAC 2022 (1) TMI 1213 - MADRAS HIGH COURT] has held that, the interest is to be attracted only where credit is not only availed but also utilised for discharging tax liabilities and if there is an attempt to wrongly avail the credit and utilise the same then the tax liability would arise.


M/s. Aathi Hotel (“the Petitioner”) is an hotelier and had purchased certain capital goods in connection with the business. The Petitioner had filed Form GST TRAN-1 and claimed a transitional credit i.e. Input Tax Credit (“ITC”) of INR 3,86,271, of VAT paid on capital goods purchased for hotel business, with a view to set off future tax liability of its furniture business, which was actually not available to the Petitioner. The transitional credit availed by the Petitioner was never utilized.

In this regard, a Show Cause Notice (“SCN”) was issued to the Petitioner followed by summary Show Cause Notice (“Summary SCN”), for which, the Petitioner replied and admitted the mistake of availing the credit and reversed the transitional credit in the GST returns.

Consequently, the Revenue Department (“the Respondent”) passed an order (“the Impugned Order”) under Section 74 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”), levying interest and imposing penalty on the Petitioner.

Being aggrieved, the Petitioner has challenged the Impugned Order.


Whether the Petitioner is liable to pay interest and penalty for availment of ITC and not utilised?


The Hon’ble Madras High Court in Aathi Hotel v. Assistant Commissioner (ST) (FAC 2022 (1) TMI 1213 - MADRAS HIGH COURT] held as under:

  • Observed that there is no record to show that the Petitioner had started such business in sale of furniture, yet the Petitioner had wrongly attempted to transition a credit of hoping that in case of future tax liability, the Petitioner can use the same against the tax liability. Thus, the intention of the Petitioner was not bona-fide.
  • Noted that, the Petitioner admitted the mistake and accordingly reversed the ITC in the returns filed for the month of January 2019-20 in Form GSTR-3B. Though an improper attempt was made by the Petitioner to transition the ITC, the Petitioner had not utilized the same and had also reversed the same within a prescribed period under Section 73 of the CGST Act.
  • Stated that, before levying penalty or interest, a proper excise was required to be made by the Respondent under Section 74(10) after ascertaining whether the credit was wrongly availed and wrongly utilised. Though, proceedings can be initiated under Section 73(1) and Section 74(1) of the CGST Act for mere wrong availing of ITC followed by imposition of interest penalty but it is only attracted where such ITC is not only availed but also utilised for discharging the tax liability. The proper method would have been to levy penalty under Section 122 of the CGST Act.
  • Partly quashed the Impugned Order and set aside the liability of interest and penalty.
  • Held that, since there was an attempt to wrongly avail the ITC and utilise the same, when the tax liability would have arisen, the Petitioner is liable to a token penalty of INR 10,000.

Our Comments:

It is to be noted that, proceedings in case where the ITC is merely availed and not utilised for payment of tax, would certainly be arbitrary and restricting the freedom to carry on trade without any justification and would be in violation of Articles 14, 19 and 301 of the Constitution of India.

Further, Section 50(3) of the CGST Act has been substituted retrospectively from July 01, 2017 vide the Finance Act, 2022, , so as to provide for levy of interest on ITC wrongly availed and utilised against payment of output liabilities, which would come into force on the date as appointed by way of a notification.

As per the above amendment, the levy of interest would not be applicable in case of the ITC is merely availed and retained in the electronic credit ledger. This amendment is also in line with the general principle of interest being compensatory in nature as mere availment of credit is just a book entry and there is no actual loss to the revenue, whereas, there is a loss to the revenue only when the ineligible credit is utilized towards payment of tax.


By: CA Bimal Jain - June 11, 2022



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