In a significant ruling restraining summary recovery powers under the CGST Act, the Andhra Pradesh High Court has held that interest under GST cannot be recovered through coercive measures without prior adjudication, unless the liability is clearly self-assessed and admitted in statutory returns.
The decision in M/s Sona Enterprises v. Assistant Commissioner of Central Tax provides important clarity on the scope of Sections 75(12) and 79 of the CGST Act, 2017, and draws a clear distinction between admitted tax liability and disputed allegations of wrongful ITC utilisation.
Factual Background
The petitioner, a dealer in iron and steel scrap, procured goods from Indian Railways and was liable to pay GST under the Reverse Charge Mechanism (RCM). Under GST law, RCM liability must be discharged in cash, and cannot be set off against Input Tax Credit (ITC).
Based on scrutiny of GSTR-3B returns for the period July 2017 to March 2021, the department alleged that the petitioner had discharged RCM liability using ITC, which was impermissible. A demand was raised, and despite payments made through DRC-03, the department proceeded to:
- Invoke Section 79(1)(c)
- Issue garnishee proceedings to the petitioner’s banker
- Recover substantial amounts towards interest, without passing any adjudication order
Aggrieved by recovery of interest without quantification or adjudication, the petitioner approached the High Court under Article 226.
Core Legal Issue
Whether interest on alleged delayed payment of tax can be recovered by invoking Section 75(12) read with Section 79, without issuing a show cause notice or passing an adjudicatory order, where the dispute relates to wrongful utilisation of ITC rather than admitted tax liability.
Department’s Stand: Reliance on Section 75(12)
The revenue contended that:
- The tax liability was “admitted”
- Late payment automatically attracted interest
- Section 75(12) permits recovery of unpaid self-assessed tax and interest without adjudication
Court’s Analysis
The High Court undertook a strict construction of Section 75(12) and rejected the department’s interpretation. The Court held:
- Section 75(12) applies only where self-assessed tax is declared in returns under Section 39 and remains unpaid
- It presupposes a clear, unequivocal admission of liability by the registered person
- Allegations of wrongful utilisation of ITC do not amount to self-assessment
The Court clarified that disputes relating to:
- Wrong availment or utilisation of ITC
- Mode of discharge of tax liability
- Computation of interest
necessarily require adjudication under Sections 73 or 74, after issuance of notice and opportunity of hearing.
Limits on Coercive Recovery Under Section 79
The judgment emphatically holds that Section 79 recovery proceedings are consequential, not standalone powers. Coercive recovery can be initiated only after:
- Proper determination of tax, interest, or penalty
- Passing of an adjudication order
- Failure of the assessee to pay the determined dues
In the present case, the Court found that no adjudicatory process had been undertaken, rendering the garnishee proceedings without jurisdiction.
Refund of Interest Recovered
The Court set aside the recovery proceedings and directed the department to refund the interest amounts recovered from the petitioner’s banker, while reserving liberty to initiate fresh proceedings in accordance with law, if so advised.
Jurisprudential Significance
This ruling reinforces several settled principles of GST law:
- Interest is not automatic in disputed cases
- Summary recovery provisions must be narrowly construed
- Section 75(12) cannot be used as a substitute for adjudication
- Procedural safeguards under Sections 73 and 74 are mandatory where facts are disputed
The judgment aligns with a growing body of High Court jurisprudence cautioning against administrative overreach through bank attachment and garnishee proceedings.
Practical Implications for GST Administration and Taxpayers
For taxpayers:
- Garnishee notices can be challenged where no adjudication exists
- Misuse of Section 75(12) is a strong ground for writ relief
For the department:
- Distinction between admitted liability and disputed liability must be carefully examined
- Interest recovery requires legal determination, not unilateral computation
Conclusion
The Andhra Pradesh High Court’s ruling decisively curtails the use of coercive recovery mechanisms in the absence of adjudication, reaffirming that GST is a procedure-driven tax statute. The judgment strengthens taxpayer protections and underscores that efficiency in revenue collection cannot come at the cost of statutory due process.
Source: IndianKanoon