HC Sets Aside Excessive Penalty Beyond SCN Amount; Remands for Fresh Adjudication

HC Sets Aside Excessive Penalty Beyond SCN Amount; Remands for Fresh Adjudication

Issue

Whether an adjudicating authority can impose a penalty in the final order that exceeds the amount proposed in the Show Cause Notice (SCN) or the tax determined, and whether such an order violates the mandatory provisions of Section 75(7) of the CGST Act.

Facts

• The Demand: The adjudicating authority passed an order against the petitioner, Metal N Strips, confirming a tax demand, interest, and a substantial penalty of ₹6.05 crore.

• The Discrepancy: The penalty amount imposed in the final order was significantly higher than what was proposed in the Show Cause Notice (SCN) and also exceeded the tax amount determined.

• Petitioner’s Plea: The petitioner challenged the order, arguing that the excessive penalty violated the statutory bar under Section 75(7), which prohibits confirming any demand higher than what is specified in the notice.

• Revenue’s Stand: The department likely defended the order based on the gravity of the alleged offence (Section 74 fraud/suppression).

Decision

• The Karnataka High Court ruled in favour of the assessee regarding the penalty but upheld the tax and interest demand.

• Violation of Section 75(7): The Court held that Section 75(7) creates an absolute bar: no demand for tax, interest, or penalty can be confirmed if it exceeds the amount specified in the SCN. The final order cannot travel beyond the scope of the notice.

• Illegal Levy: Since the penalty of ₹6.05 crore was higher than the SCN proposal, the Court declared this specific portion of the levy as illegal and contrary to statutory provisions.

• Parallel Penalties Barred: Relying on Section 75(13), the Court reiterated that if a penalty is levied under Section 73 or 74, no other penalty can be imposed for the same act under any other provision, preventing double jeopardy.

• Remand: The Court set aside only the penalty portion of the order. It remanded the matter to the authority for a fresh adjudication limited to determining the correct penalty quantum.

• Direction: The petitioner was directed to deposit the confirmed tax and interest and appear before the authority on 5 December 2025 for the rehearing on the penalty issue.

Key Takeaways

• SCN Sets the Ceiling: The Show Cause Notice is the foundational document. The final liability (tax, interest, or penalty) is capped at the amount proposed in the SCN. Any excess is legally unsustainable.

• No Surprises in Final Order: The adjudicating authority cannot introduce new grounds or higher amounts in the final order that the taxpayer was not given an opportunity to contest.

• Section 75(13) Protection: This section ensures that a taxpayer is not punished twice for the same offence under different sections of the GST Act.

• Severability: Courts can sever the invalid portion of an order (excess penalty) while upholding the valid portion (tax and interest), thereby saving the revenue’s legitimate dues while correcting the illegality.