The Karnataka High Court has quashed a GST penalty imposed on a taxpayer after holding that penalty proceedings could not be sustained while issues concerning the cancellation and amendment of its GST registration were still pending consideration.
The bench of Justice B.M. Shyam Prasad, however, permitted the tax authorities to examine the allegation that the taxpayer had wrongly availed Input Tax Credit (ITC) during the financial years 2018-19 to 2024-25 and directed that the portion of the adjudication order recording findings on the taxpayer’s ITC liability must be treated only as a show-cause notice. The taxpayer was granted an opportunity to respond to those allegations.
The petitioner/assessee is a proprietorship concern whose GST registration had been cancelled by the authorities.
The petitioner had earlier applied for an amendment to its GST registration. That application was rejected by an order dated October 10, 2024. In the meantime, the authorities also passed an order cancelling the petitioner’s GST registration.
Both decisions were challenged before the Karnataka High Court in a separate writ petition. By an order dated February 4, 2026, the High Court interfered with the rejection of the amendment application as well as the cancellation of registration and restored the matter to the authorities for reconsideration.
According to the petitioner, the restored proceedings had not yet been concluded.
During the pendency of the registration-related proceedings, the GST department issued a show-cause notice dated June 23, 2025.
The notice alleged violations of Section 16(2)(b), read with Section 31 of the Central Goods and Services Tax Act, 2017, Rule 36 of the CGST Rules, and Sections 122(1)(ii) and 122(1)(vii) of the CGST Act.
Subsequently, an Order-in-Original dated December 23, 2025 was passed for the financial years 2018-19 to 2024-25. The order imposed a penalty and also recorded findings relating to the ITC availed by the petitioner.
Chahana Enterprises approached the High Court challenging both the show-cause notice and the Order-in-Original. It also sought a declaration that Entry 3 of CBIC Circular No. 171/03/2022-GST dated July 6, 2022 was ultra vires the provisions of the CGST Act.
The petitioner contended that penalty proceedings could not have been pursued when the question of cancellation of the GST registration, considered alongside the application for amendment of registration, was pending before the authorities.
It was argued that the High Court had already restored the registration-related dispute for fresh consideration. Therefore, the penalty order and consequential demands could not be allowed to continue independently of the outcome of those proceedings.
The department opposed the petition by contending that the petitioner had been issued the show-cause notice on June 23, 2025 but had failed to submit a response.
The department also pointed out that the High Court’s February 4, 2026 order restoring the registration proceedings was passed after the impugned penalty order dated December 23, 2025.
It was further submitted that the impugned order was not merely a penalty order. According to the department, it also amounted to an adjudication of the ITC availed by the petitioner during the financial years 2018-19 to 2024-25.
The High Court held that the penalty proceedings could not be sustained when the issues concerning cancellation and amendment of the petitioner’s GST registration remained pending consideration.
The Court also noted that the adjudication relating to the alleged violation of Section 16(2) of the CGST Act was conducted ex parte, without the petitioner having shown cause against the allegations.
In these circumstances, the Court found it appropriate to interfere with the order, but only to a limited extent.
It held that the penalty component of the December 23, 2025 order was liable to be quashed. At the same time, the Court preserved the department’s right to initiate appropriate proceedings, subject to the decision in the pending registration proceedings restored pursuant to the earlier High Court order.
While setting aside the penalty, the High Court did not completely terminate the proceedings concerning the alleged wrongful availment of ITC.
Instead, it directed that the portion of the December 23, 2025 order containing findings on the petitioner’s ITC liability must be read and treated as a show-cause notice.
The petitioner was granted liberty to submit a response to the findings concerning the alleged violation of Section 16(2) of the CGST Act by August 24, 2026.
The authorities were directed to consider the reply and decide the allegations concerning the allegedly wrongful ITC claim for the financial years 2018-19 to 2024-25.
The Court clarified that all other contentions of the parties were left open and partly allowed the writ petition.
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