The Goods and Services Tax Appellate Tribunal (GSTAT), Thiruvananthapuram, has set aside an appellate order sustaining a ₹3.96 lakh input tax credit demand under Section 74 despite an express finding that the taxpayer had committed no fraud, wilful misstatement, collusion or suppression of facts. 

The  bench of Subramanya Rayaprol (Vice President) and Ramamoorthi Sriram (Technical Member) held that substituting a penalty under Section 73(9), when the show cause notice proposed a penalty only under Section 74, travelled beyond the scope of the notice. 

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The bench has noted that the first appellate authority could not retain the Section 74 tax demand after finding that the grounds necessary to invoke that provision were absent.

The Tribunal rejected the department’s argument that the demand could have survived under Section 73 because the notice and adjudication order were issued within the time limits applicable to that provision. It also rejected the contention that imposing a lower penalty caused no prejudice to the taxpayer.

Chelco Bind Grips, a proprietary concern engaged in manufacturing and selling screws, bolts, nuts, washers and similar iron and steel articles, faced proceedings following an audit under Section 65 of the CGST Act.

A show cause notice dated December 13, 2021 proposed disallowance of input tax credit amounting to ₹10,16,167 for financial year 2018–19, on the ground that the corresponding invoices were not reflected in GSTR-2A.

The adjudicating authority subsequently dropped ₹6,19,872 of the proposed demand after the relevant invoices appeared in the statement. However, an order dated December 30, 2022 confirmed the remaining ₹3,96,295 under Section 74, together with interest and penalty.

The taxpayer challenged that order before the Joint Commissioner (Appeals), Kochi.

The first appellate authority upheld the tax demand and applicable interest, reasoning that the taxpayer had not produced sufficient evidence to establish that the supplier had deposited the tax collected from it.

The authority also referred to the absence of supplier certificates contemplated by CBIC Circular No. 183/15/2022-GST dated December 27, 2022. It recorded that the supplier’s GST registration stood cancelled and that its last GSTR-3B return had been filed only up to July 2018.

However, on the question of penalty, the appellate authority expressly found that the taxpayer had no control over its suppliers’ activities and could not have known whether they had deposited the tax collected.

It concluded that there was no evidence of fraud, wilful misstatement, collusion or suppression by the taxpayer, and accepted that the disputed credit had been claimed on the strength of supplier invoices without any mens rea.

Despite those findings, the authority retained the tax demand under Section 74 and substituted the original penalty with a ₹49,534 penalty under Section 73(9)—comprising ₹39,534 under the CGST Act and ₹10,000 under the KGST Act.

The taxpayer argued that the appellate order was internally contradictory because it imposed a Section 73(9) penalty while allowing the underlying tax determination to continue under Section 74.

The taxpayer submitted that no authority had made a determination under Section 73(1), and that a penalty under Section 73(9) could not rest on a subsisting Section 74 demand.

The department argued that the show cause notice and original adjudication order had been issued within the limitation period applicable to Section 73. It maintained that the demand would therefore have survived even if redetermined under that provision, and that the reduced penalty caused no prejudice.

The Tribunal noted that the appellate authority’s finding regarding the absence of grounds to invoke Section 74 had not been challenged by the Revenue through an appeal or cross-objections.

Having expressly found Section 74 inapplicable, the appellate authority could not nevertheless uphold the tax demand confirmed under that provision.

The Tribunal described that approach as contradictory to the authority’s own findings and a case of non-application of mind. It consequently held that the tax demand sustained in the appellate order was liable to be set aside.

The Tribunal separately examined the substitution of the penalty.

It found that the show cause notice proposed a penalty under Section 74 and contained no charge seeking imposition of a penalty under Section 73(9). Nevertheless, the appellate authority had proceeded on its own to impose a penalty under the latter provision.

The bench held that this action exceeded the charges laid out in the notice. The taxpayer had never been asked to explain why a Section 73(9) penalty should be imposed.

The Tribunal further held that the Revenue could not justify the substituted penalty merely because it was lower than the penalty originally imposed. A penalty under a different statutory provision from the one invoked in the notice was, in the circumstances of the case, null and void.

The Tribunal held that the possibility of sustaining a hypothetical Section 73 proceeding did not validate the actual Section 74 demand.

Once the first appellate authority had found no grounds for invoking Section 74—and the Revenue had left that finding unchallenged—the department could not seek to preserve the demand at the Tribunal stage by relying on a provision not invoked in the show cause notice.

The bench allowed the appeal on these jurisdictional grounds alone and declined to examine the taxpayer’s remaining arguments. 

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