Demand of Interest and Penalty is not valid if the amount of tax demanded was already available in the credit ledger during the impugned period and Assessee has neither utilised nor wrongfully availed Input Tax Credit.

Case Title: Tvl. Kumaran Filaments (P.) Ltd. vs. Commissioner of Central GST & Central Excise

Court: High Court of Madras

Petition Number: W.P. (MD) No. 11113 of 2020, W.M.P. (MD) No. 9729 of 2020

Category: Transitional Credit (CENVAT to ITC)

Date of Judgement: 14 September 2021

Relevant Sections: Sections 50(3), 73(1), 122(2)(a), 140, and 174 of the CGST Act; Rules 121, 142(1)(a), and 143 of CGST Rules

Facts of the Case

[Para 2–5] The petitioner, a registered taxpayer, carried forward unutilised CENVAT credit of ₹50,21,080 from the pre-GST regime (April–June 2017) through TRAN-1 form. While the petitioner attempted to file ER-1 returns for those months, they faced technical glitches on the ACES portal despite successful uploads. The Department claimed non-filing of ER-1 and directed reversal of CENVAT credit.

[Para 5] During audit, the Department contended that the ER-1 returns were not filed and hence, the petitioner wrongly availed transitional credit. Consequently, the petitioner reversed the credit voluntarily in GSTR-3B of May 2019. The credit remained unutilised till reversal.

[Para 6–8] A Show Cause Notice under Section 73(1) was issued for disallowance of transitional credit, interest under Section 50(3), and penalty under Section 122(2)(a). The Order-in-Original dated 04.05.2020 confirmed the demand and imposed interest and penalty.

Questions in Consideration

[Para 10–12]

1. Whether demand of interest is valid when the tax was never utilised and was reversed from available electronic credit?
2. Whether penalty under Section 122(2)(a) is sustainable when the credit was not utilised or availed fraudulently?

Observations of Court

[Para 25–27] The Court noted that the entire amount of ₹50,21,080 remained in the electronic credit ledger and was never utilised. Citing Maansarovar Motors Pvt. Ltd. and CIT v. Anjum H. Ghaswala, it held that interest is meant to compensate loss to revenue. As the credit was always available, no interest is justifiable.

[Para 28–30] On penalty, the Court emphasized that under Section 122(2)(a), penalty arises only if ITC is wrongly availed or utilised. Since the petitioner had not utilised the credit at all, and it remained in the ledger till reversal, penalty was not applicable.

Judgement of the Court

[Para 31–32]

• Sustained disallowance and appropriation of transitional credit (Clause 1 and 2 of Order).
• Set aside demand for interest and penalty (Clause 3 and 4 of Order) as being unjustified.
• Writ petition was partly allowed with no order as to costs.

Between Fine Lines

• Transitional credit reversed from available ledger without usage cannot attract interest.
• If ITC is not actually utilised, penalty under Section 122(2)(a) cannot be imposed.
• A technical failure in portal submission, if evidenced, may support taxpayer’s case.
• Department must assess factual usage before imposing penalty or interest.
• Availability of credit in ledger negates presumption of revenue loss.

Summary of Referred Cases

Takeaway

“Credit Available, But Not Used—No Interest, No Penalty”