Unless the ITC is both availed and utilized, interest cannot be levied on the registered taxpayer

The Hon’ble Calcutta High Court, in the case of M/s Utpal Das v. State of West Bengal [Writ Petition No. 18241 of 2022 dated July 18, 2024] quashed the Orders of the proper officer and the Appellate Authority, where the Assessee claimed excess ITC due to clerical mistake but voluntarily debited its electronic credit ledger by filing Form GST DRC-03 to reverse ITC, interest could not be levied on Assessee.

Facts:

M/s Utpal Das (“the Petitioner”) received the notice dated February 22, 2021 in FORM GST DRC-01A identifying liability inclusive of the interest payable for the April 2018 to March 2019 tax period.

Consequently, the Petitioner responded to the FROM DRC-01A and admitted that due to the clerical mistake in filing FORM GSTR-09, the Petitioner had availed the excess Input Tax Credit (“ITC”). However, the ITC was not utilized, by filing a FORM GST DRC-03 dated March 20, 2021. The Petitioner had voluntarily reversed such entry by debiting its electronic credit ledger.

It is pertinent to note that earlier, a SCN dated March 23, 2017 was issued against the Petitioner under Section 73 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) in respect of interest and penalty for the tax period April 2018 to March 2019. Hence, the Order dated April 08, 2022 (“the Impugned Order-I”) was passed under Section 73 of the CGST Act in which the Petitioner was saddled with interest and penalty. Being aggrieved by the Impugned Order-I, the Petitioner had appealed against the Impugned Order-I under Section 107 of the CGST Act.

The Appellate Authority passed an Order dated May 13, 2022 (“the Impugned Order-II”) that the proper officer had acted as per the provisions of the law in imposing interest and penalty on the Petitioner.

The Petitioner contended that immediately upon receipt of the notice in Form GST DRC-01A, the Petitioner had acted on the basis thereof and had voluntarily debited its electronic credit ledger by filing Form GST DRC-03.  

Hence, aggrieved by the Impugned Orders the Petitioner had filed the writ petition before the Hon’ble Calcutta High Court.

Issue:

Whether the interest can be levied on the on the wrongful availment of the ITC due to clerical error?

Held:

The Hon’ble Calcutta High Court in Writ Petition No. 18241 of 2022 held as under:

• Observed that, the ITC, though wrongfully availed, was not utilized by the Petitioner. Hence, unless, the ITC is wrongfully availed and utilized, in terms of Section 50(3) of the CGST Act interest is not leviable. The said section had been amended by Finance Act of 2022 with retrospective effect from July 1, 2017.
• Relied on, Larsen Toubro Ltd. v. State of West Bengal [WPA No. 2654 of 2020, dated December 13, 2022] wherein coordinate bench had concluded that unless a registered tax payer avails and utilized ITC, interest cannot be levied. Similar views had been taken by the Hon’ble High Courts of Madras, Punjab and Haryana in the cases of Grundfos Pumps India (P) Ltd. v. Joint Commissioner of GST & Central Excise 97 GST 1120/74 GSTL 55 (Mad.), Deepak Sales Corporation v. Union of India [CWP No.283 of 2023],and Ranjan Sarkar v. Assistant Commissioner of State Tax [W.P.A. NO. 1108 OF 2022], respectively.
• Noted that, Rule 142 of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”) and Section 73 of the CGST Act has attempted to claim that issuance of a notice in form DRC-01A, constitutes initiation of proceedings and as such according to him by reasons of issuance of notice in FORM DRC-01A the proceeding having commenced, in terms of proviso to section 50(1) of the CGST Act. Hence, proceeding under Section 73 or 74 of the CGST Act, can initiate with issuance of a show cause notice and not prior thereto. A perusal of Rule 142(1A) of the CGST Rules would in no uncertain terms make the situation clear. The same provides that before service of notice to the person chargeable with tax, interest or penalty under Section 73(1) or Section 74(1) of the CSGT Act as the case may be, the registered tax payer must be communicated with the determination in FORM DRC – 01A.
• Observed that, the Petitioner had debited its electronic credit ledger to reverse the ITC availed. According to the Section 49(4) of the CGST Act states that the amount available in the electronic credit ledger can be used to make payments towards the output tax. Further, Sections 50(1) proviso of the CGST Act, read with Section 49 of the CGST Act, read with Rule 86 of the CGST Rules and 87 of the CGST Rules, it would be apparent that payment of interest and penalty can only be made by debiting the electronic cash ledger and not from the electronic credit ledger. The payment was made on March 20, 2021 in the FORM GST DRC-03 by debit of electronic credit ledger, and it was made before the issuance of the SCN in FORM GST DRC-01. Hence, there is no irregularity. Further Section 50(3) of the CGST Act specifically provides that only in cases where ITC has been wrongly availed and utilized that the registered taxpayer shall pay interest on such ITC, wrongly availed and utilized. Therefore, unless the ITC is both availed and utilized, interest cannot be levied on the registered taxpayer.
• Held that, the Impugned Order-1 passed under Section 73(9) of the CGST Act is contrary to the statutory provisions. Further, the proper officer cannot charge interest from the Petitioner. The Impugned Order-1 passed by the proper officer which was, merged with the Impugned Order-2 passed by the Appellate Authority cannot be sustained and was set aside. Consequentially, the demand raised by the Respondents on the account of interest and penalty is also not sustainable and was quashed.

Our Comments:

Rule 88B of the CGST governs “Manner of calculating interest on delayed payment of tax”. The Explanation to it states that ITC wrongly availed shall be construed to have been utilised, when the balance in the electronic credit ledger falls below the amount of ITC wrongly availed, and the extent of such utilisation of ITC shall be the amount by which the balance in the electronic credit ledger falls below the amount of ITC wrongly availed.

If ITC is reversed on your own (without any written letter or notice or summons from the audit or any wing of the department), the benefit of ‘interest only on net cash liability’ is available, otherwise not.

If ITC is reversed after commencement of any proceedings under Section 73 or Section 74 of CGST Act, no benefit of ‘interest only on net cash liability’ is available. In other words, interest on gross liability is payable.

If recovery/reversal of ITC availed and utilised is initiated under Section 73 or Section 74, the assessee falls in the exclusion clause as he has evaded tax and caused loss to the revenue. In that situation, interest has to be paid on the amount of ITC availed and utilised irregularly, notwithstanding having sufficient balance lying in both Electronic Credit Ledger and Electronic Cash Ledger.

The facility of payment of interest only on the net cash liability is not meant for those registered persons who pay due tax after commencement of any proceedings under Section 73 or 74 and not on their own.

In a pari materia case of M/s Ranjan Sarkar v. Assistant Commissioner of State Tax [Writ Petition No 1108 of 2022 dated March 06, 2024] the Calcutta High Courtruled that interest under Section 50(3) of the CGST Act is not payable in instances of the incorrect availment of the ITC and its subsequent reversal, based on the retrospective amendment made in the Finance Act, 2022.

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