GSTAT Bengaluru Quashes Section 74 Penalty on ITC Mismatches Discovered During Audit, Reaffirms Need for Foundational Facts

The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru Bench, recently delivered a crucial ruling regarding the invocation of penal provisions under the Central Goods and Services Tax Act 2017. In the matter of Conduent Business Services India LLP Vs Commissioner of Central Tax, the Tribunal adjudicated on whether the mere discovery of tax shortfalls during a departmental audit automatically justifies the imposition of severe penalties under Section 74 of the CGST Act.

The Tribunal unequivocally ruled that without explicit proof of deliberate suppression, fraud, or willful misstatement with the intent to evade tax, the revenue department cannot mechanically invoke Section 74. This comprehensive analysis delves into the procedural history, the preliminary objections regarding institutional bias, the substantive legal framework governing tax penalties, and the judicial precedents relied upon by the Tribunal.

Background of the Dispute and Procedural Timeline

The dispute originated from a departmental audit conducted under Section 65 of the CGST Act, covering the financial period from July 2017 to March 2020. The audit culminated in an enquiry memo dated 23.05.2022, which raised total tax demands amounting to ₹19,28,456.

Demonstrating a cooperative compliance approach, the assessee voluntarily discharged the agreed portion of the tax liability. As per the order, the assessee utilized Form GST DRC-03 on 18.06.2022 and 07.07.2022 to deposit an agreed tax principal of ₹7,78,693 alongside applicable interest amounting to ₹5,77,235. Following these pre-notice payments, the final audit report was issued under Section 65(6) on 01.12.2022.

Subsequently, a formal Show Cause Notice (SCN) was issued on 25 January 2023, proposing the recovery of the tax, interest, and the imposition of a 100% penalty under Section 74. The assessee contested the un-agreed portions and the penal proposals via Form GST DRC-06.

The Adjudication and Appellate Phases

The initial Adjudicating Authority passed the Order-in-Original (OIO) on 12.06.2023. The authority categorized the audit objections into three distinct issues:

  1. Issue 1: Excess Input Tax Credit (ITC) claimed in GSTR-3B as compared to GSTR-2A (Total demand: ₹17,06,697).
  2. Issue 2: Availment of ineligible ITC blocked under Section 17(5) (Total demand: ₹1,19,169).
  3. Issue 3: Irregular transitional credit claimed via TRAN-1 (Total demand: ₹1,02,590).

The Adjudicating Authority confirmed the agreed tax and interest but dropped the Section 74 penalty for Issue 1 and Issue 3. However, the penalty was confirmed for Issue 2, which the assessee subsequently paid at a reduced rate of 50% under Section 74(11) via Form GST DRC-03 on 13.06.2023.