ITC Availment Under Wrong Head Should Not Be Penalized: Kerala High Court Rules.

Kerala High Court Rules: No Penalty for ITC Availment Under Wrong GST Head

The Kerala High Court, in a landmark decision, has ruled that misallocation of Input Tax Credit (ITC) between IGST, CGST, and SGST should not be penalized. The judgment was delivered in the case MARUTHENGAL MOIDEEN & OTHERS vs. STATE TAX OFFICER & OTHERS, under WP(C) No. 20837 of 2024, on January 13, 2025.

Background of the Case

The case revolved around the issue of wrongly availed ITC under different GST heads, leading to a tax demand and penalty by the authorities. The petitioners challenged the tax department’s order before the High Court.

Key Points of the Case

• The petitioners, registered taxpayers under the GST Act 2017, had wrongly availed ITC under CGST and SGST instead of IGST.
• The tax department initiated proceedings under Section 73 of the CGST Act, claiming that this was a violation of Section 16(2)(c).
• An order was passed, determining that the petitioners had wrongly claimed an excess ITC of ₹2,00,219/- each under CGST and SGST.
• They were asked to pay the amount with interest and penalties within three months.
• The petitioners filed a rectification petition, which was dismissed, leading them to approach the Kerala High Court.

Arguments and Legal Considerations

The tax department contended that:

• The petitioners wrongly availed ITC under CGST and SGST instead of IGST.
• This misallocation justified the penalties and demand.
• The court should not interfere in tax administration under Article 226 of the Constitution of India.

The petitioners argued that:

• ITC credits are maintained in a common electronic credit ledger.
• The credit pool functions like a wallet with compartments for IGST, CGST, and SGST, allowing flexible utilization.
• The error did not result in revenue loss to the government.
• The court should set aside the tax demand and penalties.

High Court’s Ruling and Key Observations

1. Common ITC Pool Concept

• The High Court referred to a previous ruling in Rejimon Padickapparambil Alex v. Union of India & Others (2024 KHC Online 7215).
• It reiterated that misallocation of ITC does not amount to wrongful availment.
• The electronic credit ledger should be treated as a common pool where ITC can be adjusted across different tax heads.

2. No Revenue Loss to the Government

• The court noted that the government did not suffer any financial loss due to the wrong allocation.
• Since the tax liability was met through ITC, imposing a penalty was unjustified.

3. Orders Set Aside and Reconsideration Directed

• The High Court set aside the disputed orders (Ext.P6 and Ext.P10).
• It directed the tax authorities to reconsider the issue within three months.
• The reconsideration must take into account the legal position established in Rejimon Padickapparambil’s case.

Implications of the Judgment

This ruling provides clarity on ITC allocation errors and protects taxpayers from unnecessary penalties in such cases. Key takeaways include:

• Misallocation of ITC is not the same as wrongful availment.
• No penalty should be imposed if the government does not suffer revenue loss.
• Taxpayers can seek legal relief if penalized for such errors.

Conclusion

The Kerala High Court’s decision sets an important precedent in GST litigation. Businesses must ensure proper ITC allocation, but in case of genuine errors, they can now rely on this ruling to contest unjustified tax demands and penalties. This case reaffirms the principle that ITC credits, once in the electronic ledger, should be flexible and not lead to undue litigation or financial hardship for taxpayers.