On 7 August 2025, the Calcutta High Court delivered an important ruling on the issue of levy of penalty under the Goods and Services Tax (GST) regime. The Court held that penalty cannot be imposed on the assessee merely on the basis of allegations that the supplier’s GST registration was fraudulent, unless there is independent corroboration establishing the assessee’s involvement in or knowledge of the fraud.
Facts of the Case
- The assessee had claimed Input Tax Credit (ITC) on the basis of tax invoices issued by a supplier.
- Subsequently, the supplier’s GST registration was cancelled on the ground that it was obtained fraudulently.
- The department alleged that since the supplier’s registration itself was fraudulent, the assessee’s ITC claim was invalid.
- A penalty was imposed on the assessee under Section 122 of the CGST Act.
- The assessee challenged the penalty before the High Court.
Issue
Whether penalty under GST law can be sustained solely on the basis of the supplier’s fraudulent registration, without any evidence of the assessee’s collusion or knowledge of fraud.
Arguments
Revenue’s stand:
- ITC was availed against invoices issued by a non-genuine supplier.
- As the supplier’s registration was fraudulent, the assessee’s claim was invalid.
- Hence, penalty was justified.
Assessee’s stand:
- The assessee had genuine transactions and payments were made through banking channels.
- No evidence was produced to show that the assessee knew about the supplier’s fraudulent status.
- Imposition of penalty is not automatic; it requires mens rea or at least corroborative evidence of complicity.
Judgment
- The Court observed that penalty provisions are penal in nature and require strict construction.
- Merely because the supplier’s registration was found fraudulent does not automatically establish that the assessee was a party to the fraud.
- No corroborative evidence was presented to prove that the assessee knew or ought to have known about the supplier’s fraudulent status.
- Therefore, the penalty imposed on the assessee was held unsustainable and was quashed.
Ratio Decidendi
Penalty under GST cannot be imposed solely on the basis of supplier-side irregularities like fraudulent registration, unless there is independent evidence proving the assessee’s involvement, knowledge, or willful neglect.
Key Takeaways
- Burden of proof: The department must establish the assessee’s complicity before imposing penalty.
- Protection for bona fide buyers: Genuine purchasers acting in good faith and making payments through legitimate channels should not be penalized for supplier-side fraud.
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Judicial consistency: Aligns with precedents emphasizing that ITC cannot be denied or penalty imposed without proving fraudulent intent on the assessee’s part.