SC Upholds Natural Justice: 100% GST Penalty Requires Proof of Fraud, Sends Case Back to High Court

SC Upholds Natural Justice: 100% GST Penalty Requires Proof of Fraud, Sends Case Back to High Court

The Supreme Court of India has ruled that a 100% penalty under the Goods and Services Tax (GST) cannot be imposed unless fraud is proven. Therefore, the apex court sent the case back to the Andhra Pradesh High Court for fresh consideration.

The case revolves around a company named M/s Godway Funicrafts (appellant) that was hit with a 100% penalty under Section 74 of the CGST Act, 2017. The company argued that the imposed penalty is illegal and unfair, as the GST department did not show any proof of fraud or intentional hiding of facts before issuing the final penalty order, which is a compulsory condition under Section 74 of the CGST Act and its related State provisions, and also a violation of natural justice.

Against the penalty order, the company had earlier filed a petition in the Andhra Pradesh High Court, but it was dismissed by the court in November 2020. The petitioner then filed a review application in the court, saying the GST department has not proved any intention of fraud. However, the court again dismissed the review application in May 2022, saying that this issue about fraud not being proven was not clearly raised in the initial petition.

Now, the Supreme Court, through a bench of Justice B.V. Nagarathna and Justice K.V. Viswanathan, has overruled the High Court’s decision. It said that the company had the right to raise the issue in the review application and that the High Court should have considered it seriously.

The apex court said in its ruling, “We find that the appellant, in the facts and circumstances of this case, was entitled to raise the contention regarding the imposition of 100% penalty in the review application as it was a ground raised in the memorandum of writ petition. Therefore, we find that the High Court has to consider the same on merits in the review application.” Further said, “In the circumstances, the order passed in the Review IA No.1 of 2021 dated 06.05.2022 is set aside and the same is restored on the file of the High Court of Andhra Pradesh at Amaravati.”

The Supreme Court has asked the High Court to hear the review application again, this time looking properly at the arguments served by the company, including the claim that no fraud or intentional wrongdoing was committed.

The High Court must now decide whether the penalty and interest imposed were legal and fair. If the company is not satisfied with the High Court’s decision after the rehearing, it is allowed to approach the Supreme Court again, but only regarding the penalty.