SC denies GST credit on goods subjected to penal proceedings?
It’s a settled principle that law must be interpreted the way it is, without adding any words to it.
It is on this terms one may be reading section 17(5)(i) of the CGST Act which denies ITC when the tax is paid u/s 74**
Section 74 is basically a provision invoked to raise a GST demand whenever a tax default is believed to have been made by reason of fraud or any willful misstatement or suppression of facts.
It is pertinent to note that a similar provision (like section 74) is there under the customs law under which demand is being raised towards customs and IGST payments relating to imports. However, such demands are raised u/s 28 of the customs act.
Can the plain reading principle make the GST when paid u/s 28 of customs eligible for ITC whereas in the similar circumstance ITC is denied if GST is paid u/s 74?
Be that as it may, there is another way one may arrive at the conclusion.
Section 16 of CGST which is the enabling provision for availing ITC allows the taxpayer to avail ITC on supplies which are used or intended to be used in the course or furtherance of business.
Now the fact that the IGST on imports paid u/s 28 (in circumstance similar to section 74 for non import transactions), can it be said to have been paid in the course or furtherance of business?
It is pertinent to note that Hon’ble SC has recently rejected taxpayer’s claim towards deduction of business loss incurred pursuant to the confiscation and penalty proceedings undertaken by DRI under the customs law. Below is a remark from the said ruling;
“A penalty incurred for an infraction of law could never be termed as a commercial loss in carrying on business, apart from being an abnormal incident, consequently, it cannot be deducted. It falls on the assesse in some character other than that of a trader. A mere connection between the loss and the business of the assesse per se can never be the sole factor. To put it simply, this Court has made the position abundantly clear that a penalty can never be understood as a commercial expenditure/loss for the purpose of the business nor a disbursement made to earn profit.”
Considering the above, I think the plain reading principle holds good till the time it does not leads to a differential treatment and that too merely on technical grounds.
Further, it can well be inferred from the combined reading of Section 16 and 17(5)(i) that the law clearly contemplates ITC restrictions when GST is paid in contravention of a certain provisions and situation.
Hon’ble SC once held that infraction of law is not a normal incident of business, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss merely because the loss is connected with the business.
Let’s wait to see how the law turns out.
The copy of the order is as under:
Commissioner-of-Income-Tax-Jaipur-Vs-Prakash-Chand-Lunia-D-Thr.Lrs_.-Anr.-Supreme-Court-of-India-1-1
