Taxpayer's GST registration cancellation challenged over disputed Input Tax Credit claims requires verification and reconciliation under Section 73

The Jharkhand HC addressed a GST registration cancellation case involving wrongful Input Tax Credit (ITC) availment on inward supplies and demand under Section 73. The court found that while the petitioner paid taxes to another party for works performed, verification was needed to confirm if payments matched invoices for claimed ITC. Since parties were assessed under different circles (Bokaro and Garhwa), the court directed the Additional Commissioner (Headquarters), Ranchi to conduct verification and reconciliation. All parties were ordered to appear with relevant records on April 5, 2023, with a report required by April 12, 2023.

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ISSUES PRESENTED AND CONSIDERED

1. Whether cancellation of GST registration on the ground of excess availment of input tax credit (ITC) - i.e., availing ITC in GSTR-3B in excess of accrual shown in GSTR-2A/2B - is sustainable for the period 1 June 2020 to 31 October 2020, given an amendment (Rule 21(e)) that came into force on 22 December 2020.

2. Whether proceedings and levy under Section 73(9) of the JGST Act for tax period April 2020 to March 2021 (initiated after ASMT-10 notice) are justified when the supplier allegedly did not file GSTR-1/GSTR-3B and did not deposit GST collected, causing mismatch in purchaser's returns and alleged wrongful availment of ITC.

3. Whether a registered recipient (purchaser) can be penalized or have registration cancelled where the supplier (seller) failed to file returns or deposit tax notwithstanding the purchaser's payment and self-assessment.

4. What remedial / investigatory steps are appropriate where there is an admission by the supplier of non-filing/non-payment and a factual dispute as to whether amounts were paid to the supplier against the invoices in question (i.e., scope and forum for reconciliation of records and possibility of revocation of cancellation under Section 30).

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Prospective application of Rule 21(e) and validity of cancellation for June-October 2020 period

Legal framework: Rule 21(e) (amendment effective 22 December 2020) was relied upon by the petitioner to contend that cancellation proceedings based on that ground could not be applied retrospectively to cover 1 June 2020-31 October 2020. The statutory scheme relevant includes Section 16 (conditions for availing ITC) and the rules framed thereunder governing reconciliation of ITC between GSTR-3B and GSTR-2A/2B.

Precedent treatment: Petitioner relied upon an earlier decision of the High Court (M/s. Tarapore & Co.) concerning protection of bonafide dealers where fault lay with selling dealer; the Court was referred to that ratio for analogous application under GST.

Interpretation and reasoning: The Court recognized the petitioner's plea that Rule 21(e) was prospective and may not validly apply to the earlier period; the judgment records this contention as a live issue requiring examination of returns, invoices and the temporal scope of the rule. The Court did not decide finally on retrospective application but treated it as a material legal question to be addressed in the verification exercise.

Ratio vs. Obiter: The remarks are interlocutory and procedural; no authoritative ratio on retrospective application was laid down. The Court left the substantive determination to the competent authority after factual verification (obiter/directions rather than ratio).

Conclusion: Whether Rule 21(e) can be applied to the June-October 2020 period remains undecided by the Court; the matter is to be explored in the reconciliation and fact-finding process directed by the Court.

Issue 2 - Validity of proceedings under Section 73(9) when supplier did not file returns or deposit GST

Legal framework: Section 73(9) (levy of tax, interest and penalty following scrutiny / assessment) read with ASMT-10 notices and the GST return forms (GSTR-1, GSTR-3B, GSTR-2A/2B) set out the assessment/adjudi catory procedure and evidentiary basis for tax liability.

Precedent treatment: The Court noted reliance on the Court's prior decision supporting protection of bona fide purchasers where sellers default; however, it did not adopt or overrule any precedent on Section 73(9) applicability.

Interpretation and reasoning: The Court observed the factual allegation in the Section 73 proceedings that the supplier had not filed GSTR-1 or GSTR-3B returns. The petitioner contended he paid taxes as per bills and self-assessment, but the auto-generated GSTR-2A/2B showed a lower ITC figure because the supplier did not deposit GST. The Court found these factual disputes material to the validity of the Section 73 levy and refrained from adjudicating them on the writ, preferring an administrative reconciliation.

Ratio vs. Obiter: The Court's refusal to decide the legality of Section 73(9) levy on these facts is procedural; the direction to investigate is obiter in terms of legal principle but necessary to resolve the statutory assessment issues.

Conclusion: The warrant for levy under Section 73(9) was not finally upheld or quashed; the Court directed factual verification and left the ultimate determination to the competent authority based on that reconciliation.

Issue 3 - Liability of purchaser where supplier defaults in filing returns / depositing tax

Legal framework: Section 16 (entitlement to claim ITC), Sections 42 and 76 (assessment and recovery provisions referenced by petitioner), and the overall compliance architecture under the JGST Act governing interplay between supplier's filings and recipient's ITC claim.

Precedent treatment: The petitioner invoked the High Court's decision protecting a bonafide dealer from being penalized for the selling dealer's lapses; the Court considered this precedent as persuasive for analogous relief under GST.

Interpretation and reasoning: The Court acknowledged that if the petitioner had genuinely paid and self-assessed taxes in respect of the invoices, penalizing the petitioner for the supplier's failure to deposit taxes or file returns could be inequitable. The Court noted the supplier's admissions (non-filing, financial distress, readiness to pay in installments subject to waiver of interest/penalty) and the existence of a billing dispute between the parties, all of which necessitate verification before concluding purchaser's liability.

Ratio vs. Obiter: The Court did not establish a binding legal principle absolving recipients categorically; rather, it signalled that liability depends on factual matrix and is to be determined after reconciliation - this approach is procedural guidance (obiter/direction) rather than an authoritative ratio.

Conclusion: The question of penalizing the purchaser is left open; if the verification shows the supplier's default caused the mismatch despite petitioner's bona fide payment, the competent authority may consider revocation of cancellation and other equitable measures.

Issue 4 - Appropriate remedial/investigatory steps and scope for revocation under Section 30

Legal framework: Section 30 (power to revoke cancellation of registration), administrative power to verify and reconcile returns, and authority to impose conditions for revocation; Rule-making and assessment procedure under JGST Act.

Precedent treatment: The Court accepted the petitioner's submission that power to revoke cancellation exists under Section 30 and may be exercised subject to conditions; prior decisions about protecting bonafide dealers were relied upon for guidance.

Interpretation and reasoning: Given admissions by the supplier and factual disputes about payment and tax deposit, the Court directed an administrative verification and reconciliation exercise by the Additional Commissioner (Headquarters), Ranchi, impleaded as a party. The Court specified that petitioner, supplier and relevant tax officers must appear with records for an on-record reconciliation and that the Additional Commissioner should file an affidavit report. The Court expressly left open the possibility that, if the fault lies with the supplier, the competent authority may revoke the petitioner's cancellation and may impose such conditions as deemed fit (including requiring payments or other safeguards).

Ratio vs. Obiter: The direction to effect verification and the invocation of Section 30 for potential revocation is interlocutory and remedial; it constitutes a procedural order rather than a final legal determination on revocation. The guidance that revocation is available subject to conditions reflects settled statutory power (ratio limited to case facts).

Conclusion: The Court ordered a fact-finding reconciliation by the Additional Commissioner with authority to recommend action including revocation of cancellation under Section 30, and allowed the competent authority discretion to impose conditions; the matter is remitted for administrative determination based on verified records and the Additional Commissioner's report.

Cross-references and Practical Outcomes

1. The issues concerning retrospective application of Rule 21(e), the validity of Section 73(9) assessment, and purchaser's liability due to supplier's non-filing are interdependent and were directed to be resolved via the reconciliation exercise (see Issues 1-3 above).

2. The Court relied on and found the ratio of earlier decisions protecting bona fide purchasers persuasive but did not finally adopt a sweeping rule; application depends on the fact-finding directed (see Issue 3).

3. The competent authority retains discretion under Section 30 to revoke cancellation and to impose conditions; the Court did not fetter that discretion but mandated investigatory steps prior to final administrative action (see Issue 4).

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