Penalty for Delayed ITC Reversal Unjustified as Credit Reversed and No Undue Benefit Accrued

Penalty for Delayed ITC Reversal Unjustified as Credit Reversed and No Undue Benefit Accrued

Issue

Whether a penalty under GST law is legally sustainable for the delayed reversal of wrongfully transitioned Input Tax Credit (ITC) on obsolete inventory, when the taxpayer voluntarily reversed the credit and maintained a sufficient credit balance throughout, resulting in no revenue loss or undue benefit.

Facts

• Dispute Origin: The assessee had carried forward ITC related to slow-moving or obsolete inventory for the period from July 1, 2017, to October 23, 2019.

• Voluntary Reversal: On October 23, 2019, the assessee voluntarily reversed the proportionate ITC attributable to this inventory.

• Departmental Action: The department issued a Show Cause Notice (SCN) alleging wrongful transition of credit and proposed a penalty.

• Adjudication Order: The adjudicating authority confirmed the penalty but notably dropped the demand for interest. The authority accepted that the assessee had maintained a sufficient credit balance in their electronic ledger throughout the disputed period, implying there was no loss of revenue to the exchequer.

• Writ Petition: The assessee challenged the penalty order in the High Court, arguing that the delay in reversal conferred no benefit and that the SCN was not maintainable.

Decision

• The Madras High Court allowed the writ petition in favour of the assessee.

• It held that the imposition of a penalty was unjustified in the specific facts of the case.

• The reasoning was based on the finding that the assessee had already reversed the proportionate credit.

• Crucially, the Court observed that since the assessee had sufficient credit balance and interest was already dropped by the lower authority, no undue advantage or benefit had accrued to the assessee due to the delay in reversal.

Key Takeaways

• No Loss, No Penalty: This judgment reinforces the principle that penal provisions should not be invoked mechanically. If the tax/credit was merely a book entry and was never utilized (proven by sufficient balance), and later reversed, there is no revenue loss to justify a penalty.

• Interest Dropped implies Penalty Dropped: The fact that the adjudicating authority dropped interest (acknowledging no utilization of funds) laid the groundwork for quashing the penalty. It is logically inconsistent to waive compensation for loss (interest) but impose punishment for the same act (penalty) when no intent to evade is proven.

• Voluntary Compliance Mitigates Liability: The voluntary reversal of the credit by the assessee, even if delayed, served as a mitigating factor against the imposition of penalties.