July Court Room Series

GST COURT ROOM SERIES

Interest and Penalty Cannot Travel Beyond the Show Cause Notice?
Analysis of the Delhi High Court decision in Sh. Bhupender Kumar Proprietor of M/s  Dabas Construction Co. vs. The Commissioner, GST, West Delhi & Another W.P.(C) 1184/2026 , HC-16-642, dt. 11.5.26

Facts

The petitioner, a sole proprietor engaged in construction activities, was issued a Show Cause Notice (SCN) dated 29 December 2023 by the GST Department alleging wrongful availment of Input Tax Credit (ITC) relating to Financial Year 2018-19. According to the department, the ITC availed by the petitioner was inadmissible in view of Section 16(4) of the Central Goods and Services Tax Act, 2017, as the credit had been claimed beyond the prescribed time limit. The department further alleged that although the petitioner ultimately reversed the disputed ITC, such reversal was made only in December 2023, nearly four years after the relevant tax period. The petitioner challenged the proceedings primarily on the ground that while the SCN proposed reversal of ITC, it did not specifically mention any demand towards interest or penalty, nor did it indicate the applicable rate of interest or the quantum of penalty proposed to be imposed. Aggrieved by the subsequent demand of interest and penalty, the petitioner approached the Delhi High Court by way of a writ petition.

Issue

The principal issues before the High Court were:

⃝ Whether the GST authorities could levy and recover interest and penalty when the Show Cause Notice did not specifically propose such recovery or quantify the amount payable.

⃝ Whether omission to disclose the proposed demand of interest and penalty violated Sections 75(6) and 75(7) of the CGST Act, 2017.

⃝ Whether the High Court should entertain the writ petition or direct the petitioner to avail the statutory appellate remedy.

Relevant Legal Provisions

Section 16(4) – CGST Act, 2017

Prescribes the time limit within which Input Tax Credit can be availed. Any ITC claimed beyond the statutory time limit is not admissible.

Section 75(6) – CGST Act, 2017

Mandates that the proper officer shall determine the amount of tax, interest and penalty after considering the representation made by the taxpayer.

Section 75(7) – CGST Act, 2017

Provides that the amount of tax, interest and penalty demanded in the order shall not exceed the amount specified in the Show Cause Notice, nor can it be based on grounds not mentioned therein.

Arguments of the Appellant

The petitioner contended that the impugned Show Cause Notice was legally unsustainable as it failed to comply with the mandatory requirements prescribed under Sections 75(6) and 75(7) of the CGST Act.It was argued that:

⃝ The statute requires the Show Cause Notice to clearly disclose the amount of tax, interest and penalty proposed to be recovered.

⃝  The impugned notice merely proposed reversal of ITC without specifying any liability towards interest or penalty.

⃝ Neither the applicable rate of interest nor the quantum of penalty was disclosed in the notice.

⃝ Consequently, recovery of interest and penalty through the adjudication order travelled beyond the scope of the Show Cause Notice and violated the principles of natural justice.

⃝ The petitioner therefore sought quashing of the Show Cause Notice and the consequential proceedings.

Arguments of the Respondent

The GST Department submitted that the petitioner had wrongly availed ITC pertaining to FY 2018-19 in violation of Section 16(4) of the CGST Act and had reversed the same only in December 2023. The department argued that:

⃝ Once inadmissible ITC had been wrongly availed and retained for several years, liability to pay interest and penalty arose under the statutory framework.

⃝ Interest is a statutory consequence flowing automatically from delayed reversal or payment and need not necessarily be separately quantified in the Show Cause Notice.

⃝ Mere absence of specific computation of interest or penalty in the notice would not invalidate the proceedings.

⃝ The petitioner had an effective statutory remedy by way of appeal and therefore the writpetition ought not to be entertained.

Judgment

The Delhi High Court declined to interfere with the proceedings in exercise of its writ jurisdiction.

The Court observed that:

⃝ The petitioner had an efficacious alternative remedy of appeal under the CGST Act.

⃝ Questions relating to the validity of the demand, applicability of Sections 75(6) and 75(7), and legality of levy of interest and penalty could appropriately be examined by the appellate authority.

⃝ The Court therefore refrained from adjudicating the merits of the controversy and relegated the petitioner to pursue the statutory appellate remedy available under the Act.

Accordingly, the writ petition was disposed of with liberty to the petitioner to file an appeal in accordance with law.

Conclusion:

While it is settled that interest is compensatory in nature and may arise automatically under the statute, the requirement of due process cannot be overlooked. If the department proposes to recover interest or impose penalty, the taxpayer should ordinarily be informed of the statutory provision invoked, the basis of computation and the proposed liability. Such disclosure enables an effective reply and meaningful opportunity of defence.

The Delhi High Court has not rendered any conclusive finding on the interpretation of Sections 75(6) and 75(7), having relegated the petitioner to the appellate remedy. Consequently, the substantive legal issue remains open for adjudication by the appellate authorities and, if necessary, by higher judicial forums.