GST UPDATE ON ALLAHABAD HIGH COURT FOR PENALTY UNDER SECTION 122

The penal provisions are usually stringent in taxation laws and are often the subject matter of litigation. Recently, hon’ble High Court in the case of M/s Metenere Ltd. pronounced a very interesting interpretation of the provision contained in section 122 of the CGST Act, 2017 with respect to imposition of penalty in cases where proper records were not maintained as required in the Statue. The reasoning adopted while pronouncing the decision is the subject matter of discussion of our present update.

Anti-evasion team visited the premises of the petitioner for verification of the records. The petitioner claimed that it produced all the records, however, the records of GST were not available in the factory premises as the same were kept at head office of the petitioner. It was submitted that all the records were maintained at the principal place of business of the petitioner situated at Delhi which was duly mentioned in the registration certificate also. Moreover, it was stated that documents in the electronic form were stored in the computer however the same could not be given to the respondent authorities on their visit as internet was not functional on the said date. It was also stated that there was no allegation with regard to evasion of duty and no exercise was conducted by department to establish and ascertain the duty evaded. Consequently, the order of confiscation and imposition of penalty was not justifiable.

The hon’ble High Court after pursuing the provisions of law, has held that as even if it is accepted for the sake of argument that the documents were not maintained at the registered office or any other place of business, there is no finding to the effect that any supply was made with an intent to evade payment of tax. Hence, confiscation was declared as wholly arbitrary and illegal. As regards levy of penalty under section 122 of the CGST Act, 2017, the hon’ble High Court categorised the infractions into two categories-A and B. Category A comprised of those offences which involved evasion of tax whereas category B consisted of those offences which did not involve any revenue leakage. It was stated that the quantum of penalty under section 122 is Rs. 10,000/- or an amount equivalent to tax evaded or refund claimed fraudulently. Therefore, it was concluded that the default in maintaining books/records was covered under category B so the penalty can be imposed only for Rs. 10,000/-. An interesting point to be noted here is that the hon’ble High Court emphasized that since no exercise for quantification of the tax evaded has been done, in pursuance to the powers conferred under section 35(6) read with section 73 or 74 of the Act, the maximum penalty that could be imposed is Rs. 10,000/-. This has the implication that even if the offence being committed pertains to category A and no efforts have been made by the revenue authorities for quantification of tax evaded by invoking the provisions contained in section 73 or 74 of the CGST Act, 2017, penalty imposable under section 122 of the CGST Act, 2017 would be restricted upto Rs. 10,000/-. Hence, the revenue authorities need to be cautious as regards determination of tax evaded under section 73 or 74 prior to initiation of proceedings for levy of penalty under section 122 of the CGST Act, 2017. Moreover, it can be concluded that where the show cause notice does not give demand of tax under Section 73 or 74 but only proposes penal provision under section 122 then only Rs. 10,000/- penalty can be imposed because tax has not been quantified under Section 73 or 74 ibid.

This decision provides a great relief as regards quantum of penalty imposable under section 122 of the CGST Act, 2017 is concerned. The interpretation that since certain offences do not lead to any tax evasion, penalty should be restricted to Rs. 10,000/- is commendable. It is hoped that the benefit of this decision is extended to a large number of assessees so that minor infractions do not attract hefty penalties.

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GST UPDATE ON ALLAHABAD HIGH COURT FOR PENALTY UNDER SECTION 122

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