Facts of the Case

M/s Bhuwalka And Sons Pvt. Ltd.'s business premises were inspected on 26 and 28 June 2019, following which a proposition notice dated 28 June 2019 was issued under Section 122(1)(xviii) of the KGST/CGST Act proposing penalty on account of an alleged difference (shortage) in stock. After the petitioner's reply, the department passed an order dated 16 August 2019 levying penalty, which the petitioner successfully appealed before the First Appellate Authority, whose order dated 14 September 2020 set aside the penalty, finding the shortage was based on mere estimation without any documentary evidence of goods having been removed or supplied without invoices. However, the Revisional Authority invoked its suo motu revisional power under Section 108 on 25 March 2021, and by an order dated 2 July 2021 reversed the First Appellate Authority's order and restored the penalty, prompting the present challenge.

Issues Involved

  1. Whether a penalty under Section 122(1) for alleged stock shortage, based only on estimation without documentary evidence of unaccounted removal or supply, can be sustained.
  2. Whether a Revisional Authority exercising suo motu power under Section 108 can reverse a reasoned appellate order without itself properly considering the material, contentions and documents on record.
  3. What is the appropriate remedy where both the appellate order (in the taxpayer's favour) and the revisional order (against the taxpayer) suffer from inadequate reasoning.

Petitioner's Arguments

  • The First Appellate Authority had correctly found that the penalty was based solely on an estimated stock shortage with no evidence — documentary or otherwise — that any goods had actually been removed or supplied without valid tax invoices or payment of tax, making the original penalty order legally unsustainable.
  • The Revisional Authority's suo motu exercise of power under Section 108, reversing this reasoned finding and restoring the penalty, was itself passed without properly considering the facts, contentions, documents and material already on record before the First Appellate Authority.

Respondent's Arguments

  • The Additional Commissioner (Revisional Authority) supported its own suo motu revisional order restoring the penalty, presumably on the basis that the First Appellate Authority had wrongly interfered with a factually justified penalty for the stock discrepancy found on physical inspection.

Court Order / Findings

  • The Court examined paragraph 5 of the First Appellate Authority's order and found it itself cryptic and unreasoned, since it merely recorded that the shortage was based on surmises without any concrete evidence, without deeper analysis, even though its conclusion (no penalty) was ultimately correct in substance.
  • It found that, in turn, the Revisional Authority had also proceeded to reverse the Appellate Authority's order without properly considering the facts, contentions, documents and material on record — meaning neither of the two orders reflected the reasoned consideration the case demanded.
  • Accordingly, both the revisional order dated 02.07.2021 and the First Appellate Authority's order dated 14.09.2020 were set aside, and the matter remitted to the First Appellate Authority for a fresh, properly reasoned consideration of the appeal, with liberty reserved to the petitioner to submit further pleadings and documents, leaving all contentions open.

Important Clarification

  • A penalty under Section 122(1) of the KGST/CGST Act for alleged stock shortage cannot rest on mere estimation of physical stock — the department must produce concrete documentary or other evidence that the shortfall represents goods actually removed or supplied without valid tax invoices and without payment of tax.
  • The suo motu revisional power under Section 108 is not a licence to reverse a favourable appellate order without independently and properly engaging with the material, contentions and documents already on record — a revisional order that merely reverses without such reasoning is itself liable to be set aside alongside the order it purports to correct.

Sections Involved

  • Section 122(1)(xviii), KGST/CGST Act, 2017 – penalty provision invoked for the alleged stock discrepancy found on inspection.
  • Section 107(11), KGST/CGST Act, 2017 – governs the powers and process of the First Appellate Authority whose order was under scrutiny.
  • Section 108(1), KGST/CGST Act, 2017 – confers suo motu revisional power on a superior authority, exercised here to reverse the appellate order.

Decision – In Favour of

The decision is disposed of with directions, in favour of the assessee in that both adverse orders (revisional and, procedurally, the appellate order) are set aside for want of proper reasoning and the appeal is remanded for a fresh, reasoned decision.

Case Details

Court: High Court of Karnataka at Bengaluru. Case No.: Writ Petition No. 1257 of 2022 (T-RES). Coram: Hon'ble Mr. Justice S.R. Krishna Kumar. Date of Order: 5 November 2025.

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