ADJUDICATION UNDER GST ACT DESPITE MORATORIUM UNDER CORPORATE INSOLVENCY RESOLTUTION PROCESS

The Proper Officer of the GST Department is given power to determine tax under Section 73 and 74 of the Act.  The Proper Officer is to issue show cause notice to the taxpayer within the time limit stipulated in the said sections.  The assessee shall give reply to the notice within the time specified in the notice.  The Proper Officer shall consider the reply filed by the assessee and pass order on hearing the assessee. 

The Insolvency and Bankruptcy Code, 2016 provides for initiating corporate insolvency resolution process against a corporate debtor either by a financial creditor under Section 7 of the Code, an operational creditor under Section 9 of the Code and by the corporate applicant itself under Section 10 of the Code.  If the application is complete in all respects the Adjudicating Authority shall admit the application.  The corporate insolvency resolution process commences from the date of passing the order.  The Adjudicating Authority shall declare a moratorium by which no legal process can be taken against the corporate debtor.

While the moratorium is in force any recovery of GST cannot be recovered by the Department since the Insolvency and Bankruptcy Code over rides the provisions of the GST Act.  The Department is to file claim to the Resolution Professional, who shall verify the claim and admit the claim either in full or in partial.

In Srei Equipment Finance Limited Versus Office of The Assistant Commissioner New Delhi, Office of The Principal Commissioner Central Goods And Service Tax CGST Delhi. - 2026 (2) TMI 826 - DELHI HIGH COURT a show cause notice was issued to the petitioner, SREI Equipment Finance Limited (‘SEFL’ for short) by the Department under Section 74 of the Central Goods and Service Tax Act, 2017 (‘Act’ for short) by invoking extended period of limitation on 25.08.2020.   The show cause notice was duly replied by the petitioners on 01.09.2020. 

In the order dated 23.12.2025 the Adjudicating Authority confirmed the demand of ineligible input tax credit to the tune of Rs.67.5 lakhs under Section 74(1) of the Act read with Section 20 of the IGST Act and corresponding provisions of State Act.  The Adjudicating Authority ordered to appropriate Rs.6,53,400/- from the amount deposited on 30.09.2020.  The Adjudicating Authority also confirmed the demand on interest on the amount Rs.67.5 lakhs and directed to appropriate Rs.2,10,715/- towards the interest from the deposit made by the petitioner on 30.09.2020.  The Adjudicating Authority also imposed penalty of Rs.67.5 lakhs under Section 74(1) of the Act read with Section 20 of the IGST Act. 

In the meanwhile, an application was filed by the Financial Creditor against the petitioner company under the Insolvency and Bankruptcy Code (‘Code’ for short) for initiating corporate insolvency resolution process.  The application for initiating corporate insolvency resolution process was admitted by the National Company Law Tribunal and declared a moratorium under Section 14 of the Code.

In the meanwhile, the Department caused investigation against the petitioner company and issued a show cause notice on 24.06.2025, which was based on the investigation conducted by the Department.  The show cause notice summarizes the liability and responsibility of the petitioner company as detailed below-

• One, AGTSPL is engaged in issuance of bills without supply of materials or rendering of service which led to availment of wrongful credit.
• The petitioner is one of the recipients of the abovesaid focussed bills and availed input tax credit.
• GSTR-2A data of the petitioner revealed that they have received input tax credit to the tune of Rs.53,46,000/- on the basis of the invoices issued by the AGTSPL.
• The petitioners declared that they have availed input tax credit to the tune of Rs.67,50,000/- during 2018-19 on the basis of the invoices received from AGTSPL.
• The petitioners did not show valid documents to prove for the availment of input tax credit for the vouchers received from AGTSPL.

From the above said facts, the Department alleged that the petitioner availed wrongful input tax credit to the tune of Rs.67,50,000/-. 

The petitioners gave a reply to the above said show cause notice on 23.07.2025.  The petitioner, in response to the show cause notice, filed a reply.  In the reply the petitioner submitted that the petitioner is regulated by the Reserve Bank of India as the petitioner is a NBFC.  The petitioner was taken to NCLT for undergoing corporate insolvency resolution process.  The Reserve Bank also superseded the Board of the petitioner vide Notification dated 04.10.2021.  The NCLT admitted the application on 08.10.2021 under Section 227 read with section 239(2)(zk) of the Code and initiated corporate insolvency resolution process against the petitioner.  The NCLT also appointed an administrator to oversee the affairs of corporate insolvency resolution process. 

The petitioner filed a writ petition before the High Court, challenging the order of Adjudicating Officer, dated 23.12.2025.  The petitioners submitted the following before the High Court-

• Once the moratorium is declared under the Code, the only option available to the Department is to submit their claims to the Resolution Professional.
• Due to moratorium, the order of Adjudicating Authority is to keep in abeyance.

The Department submitted the following before the High Court-

• There was no sufficient notice with regards to the insolvency proceedings initiated under the Code.
• The public announcement was issued at Kolkata.
• There is no reason to believe that the respondent would have had sufficient knowledge of the same.
• In such an eventuality, the position of law must be appreciated and an inference may be drawn that the Resolution Plan cannot be said to be binding upon the respondents.
• Since there is an alternative remedy by filing of appeal  the writ petition is not maintainable.

The High Court considered the submissions of both the parties.

The High Court observed in the reply to the show cause notice the petitioners submitted about the moratorium declared in the insolvency proceedings and also challenged the maintainability of the show cause notice.  A statutory protection is available to the petitioner due to moratorium under the Code.  Since in the reply the petitioner raised the ground of maintainability of the show cause notice in the presence of moratorium it is the bounden duty bound to deal with the same and the failure to do so, amounts to denial of the opportunity of being heard.

The High Court over ruled the objection raised by the Department that alternative remedy is available since the impugned order was without application of mind.  The High Court quashed the impugned order.  The High Court directed the petitioners to appear before the Authority with its written argument along with the required documents.  The Department shall grant an opportunity of being heard and deal with contentions raised by the petitioner.