GST | Technical Error Without Any Financial Implications Do Not Attract Penalties: Allahabad High Court

The Allahabad High Court has held that mere technical errors under tax laws without any financial implications should not be grounds for imposition of penalties.

While dealing with the case of goods not accompanying e-way bill, Justice Shekhar B. Saraf held,

“Mere technical errors, without having any potential financial implications, should not be the grounds for imposition of penalties. The underlying philosophy is to maintain a fair and just tax system, where penalties are proportionate to the gravity of the offense. In the realm of taxation, imposition of penalty serves as a critical measure to ensure compliance with tax laws and regulations.”

Relying on various judgments of the Allahabad High Court, the Court observed that penalty cannot be imposed when all valid documents are present and e-way bill has not been generated, unless intention to evade tax is established. The Court held that no penalty could be imposed in absence of a finding regarding intention to evade tax.

“The essence of any penal imposition is intrinsically linked to the presence of mens rea, a facet conspicuously absent from the record. The order, therefore, stands vulnerable to challenge on the grounds of disproportionate punitive measures meted out in the absence of concrete evidence substantiating an intent to evade tax liabilities.”

Factual Background

Petitioner is an authorized dealer of the Steel Authority of India Ltd. ('SAIL'). Invoices for purchase of TMT bars were issued by SAIL under Section 31 of CGST Act read with Rule 46 of CGST Rules. The goods were being transported from SAIL Yard to the petitioner's place of business, both in Allahabad District. The tax invoices accompanying the goods contained the details of the vehicle, however, the e-way bill could not be generated by the transporter, consignor and consignee due to technical glitched on the portal.

Goods of the petitioner were intercepted. E-way bills were generated before issuance of show cause notice and well before passing of penalty order under Section 129(3) of the CGST Act. However, the e-way bills were not considered by the Assistant Commissioner, Commercial Tax, (Mobile Squad), Unit – II, Prayagraj before passing the penalty order. The penalty order was affirmed by the First Appellate Authority.

Counsel for petitioner argued that the statement of the vehicle owner could not have been taken at the same time as the interception. It was submitted that one e-way bill was generated before detention and the other was generated after detention due to technical glitched. It was argued that the penalty order is a non-speaking order and no reasons had been provided for levying penalty on the petitioner.

Further, counsel for petitioner argued that the counsel for petitioner could not appear for hearing due to some unavoidable circumstances on the date of hearing and an ex-parte order was passed by the First Appellate Authority. It was argued that the same is in gross violation of the principles of natural justice and against the provisions of Sections 107 (8), 107 (9), and 107(10) of the CGST Act, 2017 and the UPGST Act, 2017. It was argued that the order was served upon the petitioner after 5 months of passing the order.

It was argued that there was no intention to evade tax on part of the petitioner, therefore, no penalty could be imposed under Section 129 of the CGST Act.

Counsel for respondent submitted that since e-way bill was not generated at the time of inspection, petitioner was in violation of the Rule 138(a) of the UPGST Rules, 2017 which mandates that e-way bill be generated before movement of goods. Since the reply fled by the petitioner was found unsatisfactory, penalty order under Section 129 was passed.

Further, it was contended that sufficient opportunity of hearing was provided to the petitioner by the First Appellate Authority. However, no one appeared on behalf of the petitioner. Accordingly, order was passed by the First Appellate Authority of the basis of the evidences on record.

High Court Verdict

The Court relied on VSL Alloys (India) Pvt. Ltd. v. State of U.P. and Another wherein the Allahabad High Court has held that even though Part-B of the e-way bill was not filled by the petitioner, there was no intention to evade tax as the other documents accompanying goods contained all necessary details of the vehicle.

The Court observed that there was no intention to evade tax on part of the petitioner as all details including details of the vehicle transporting the goods was mentioned in the tax invoices accompanying the goods.

Further reliance was placed on Modern Traders v. State of U.P. and Others wherein the Allahabad High Court granted relief to the assesee on grounds that e-way bill, though not accompanying the goods, was produced as soon as the interception was made. The Court had held that once e-way bill had been produced and all other documents were accompanying the goods, no intention to evade tax could be established to attract penalty under Section 129.

The Court observed that though the e-way bills were produced in time, both the assessing authority as well as the first appellate authority ignored them. Since one e-way bill was generated before the interception and the other was generated after interception but before penalty order was passed, the Court held that there was no intention to evade tax.

The Court held that “the petitioner cannot be made to suffer due to mere technical mistakes that may have arisen, without there being any intention to evade tax.”

The Court held that the first appellate authority had erred in holding that intention to evade tax was a necessary component under Uttar Pradesh Value Added Tax Act, 2008 but was done away with under GST laws.

“A penal action devoid of mens rea not only lacks a solid legal foundation but also raises concerns about the proportionality and reasonableness of the penalties imposed. The imposition of penalties without a clear indication of intent may result in an arbitrary exercise of authority, undermining the principles of justice. Tax evasion is a serious allegation that necessitates a robust evidentiary basis to withstand legal scrutiny.”

The Court held that establishing intention to evade tax is of paramount consideration in tax systems so as to maintain its fairness and integrity.

Accordingly, the penalty order and the subsequent order of the first appellate authority were quashed.

Case Title: M/S Falguni Steels vs. State Of U.P. And Others 2024 LiveLaw (AB) 59 [Writ Tax No. 146 of 2023]

Citation: 2024 LiveLaw (AB) 59