2025 (5) TMI 907 - HC - GST

Gujarat HC quashes GST demand order for ITC reversal on exempted goods despite prior voluntary reversal by taxpayer

Ajay Industries & Anr. Versus Union Of India & Ors.

Gujarat HC allowed petition challenging SCN for ITC reversal on exempted goods. Petitioner had already reversed ITC before SCN issuance but failed to ... Validity of SCN issued - reversal of ITC - Non-speaking order - violation of principles of natural justice - HELD THAT:- On perusal of the material available on record as well as the affidavit-in-reply filed on behalf of the respondent, it is not denied that the petitioner has reversed the Input Tax Credit prior to issuance of the show-cause notice. It also appears that only because the petitioner could not file the reply to the show-cause notice pointing out such facts, resulted into passing the impugned Order-in-Original under Section 73 of the GST Act on the ground that the petitioner did not reverse the Input Tax Credit within the time prescribed under Section 39 of the GST Act. However, in view of the amended provisions of Section 16 (5) of the GST Act, the petitioner is entitled to file returns for claiming Input Tax Credit for financial years 2017-18 to 2020-21 but in the facts of the case, the petitioner has incorrectly claim the Input Tax Credit on the exempted goods which was required to be reversed as per proviso to Section 39 (9) of the GST Act, however, the petitioner has reversed such Input Tax Credit beyond the time prescribed under Section 39 (9) of the GST Act and therefore, the respondent-Authorities without considering the fact that the petitioner has already reversed the Input Tax Credit has again asked the petitioner to reverse the Input Tax Credit resulting into double payment of tax by the petitioner, instead, respondent-Authorities ought to have issued the show-cause notice for interest or penalty to be levied for late reversal of the Input Tax Credit by the petitioner as per the provisions of Section 50 of the GST Act. Be that as it may, in the facts of the case as the petitioner has not filed any reply in spite of providing sufficient opportunity by the respondent-Authority and considering the fact that there was already reversal of the Input Tax Credit, the respondent-Authority without verifying the data available on the GSTN portal has passed the impugned order relying only upon the provisions of Section 39 (9) of the GST Act. The impugned show-cause notice which ought to have been issued for the purpose of levy of interest or penalty for late reversal of Input Tax Credit by the petitioner and not for availing of the Input Tax Credit by the petitioner on the exempted goods. In such circumstances, the respondent-Authority was either required to pass an order to recredit the Input Tax Credit already reversed by the petitioner with retrospective effect or to charge only interest and penalty as per the provisions of the GST Act. Conclusion - The reversal of ITC beyond the prescribed time should attract interest and penalty but not double recovery of tax. The authorities must consider actual reversal effected before issuing demand and ensure compliance with principles of natural justice. The mode of service by uploading on portal, while statutorily valid, must be balanced against the right to effective notice and hearing. The matter is remanded to the respondent-Authority to pass a fresh de-novo order after providing an opportunity of hearing to the petitioner in accordance with law and consider the amount deposited by the petitioner accordingly - Petition allowed by way of remand. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court include:Whether the show-cause notice dated 28.09.2023 issued under Section 73 of the GST Act for the Financial Year 2017-18 was valid, or whether it was without jurisdiction, arbitrary, mechanical, and illegal, especially in light of the petitioner's reversal of Input Tax Credit (ITC).Whether the impugned Order-in-Original dated 21.12.2023 passed under Section 73 of the GST Act was valid, considering the alleged breach of principles of natural justice, non-speaking nature of the order, and absence of personal hearing as mandated under Section 75(4) of the GST Act.Whether the petitioner's appeal delay could be condoned under Section 107(4) of the GST Act, and whether the provision barring condonation of delay is manifestly arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution.Whether the mode of service of the impugned order by uploading on the GSTN portal is valid and sufficient for legal service under Section 169(d) of the GST Act.Whether the attachment of the petitioner's bank accounts for recovery pursuant to the impugned order was justified and lawful.Whether the petitioner was entitled to claim ITC on exempted goods (by-product/waste product) and the timing and correctness of reversal of such ITC under Sections 16, 17(2), 39(9), and 73 of the GST Act.Whether the respondent authority erred in not considering the petitioner's reversal of ITC prior to issuance of the show-cause notice and in passing an order demanding double payment of tax.The correct legal consequences for late reversal of ITC, including the applicability of interest and penalty provisions under Section 50 of the GST Act.2. ISSUE-WISE DETAILED ANALYSISValidity and Jurisdiction of the Show-Cause Notice and Impugned OrderThe petitioner challenged the show-cause notice dated 28.09.2023 and the subsequent order dated 21.12.2023 on grounds of jurisdictional error, arbitrariness, and mechanical application of law. The petitioner contended that the ITC on exempted by-product (cotton oil cake) was reversed in March 2020 returns, and thus no demand for ITC was justified.The Court examined the provisions of the GST Act, particularly Section 73 which governs recovery of tax not paid or short paid. The respondent authority issued the show-cause notice alleging non-reversal of ITC attributable to exempt supplies. However, the petitioner had reversed proportionate ITC under Section 17(2) in the returns filed for March 2020, which was prior to issuance of the notice.The Court noted that the impugned order was passed without granting mandatory personal hearing under Section 75(4), violating principles of natural justice. Further, the order was not physically served or sent by registered email, but only uploaded on the portal, which the petitioner was unaware of, raising questions on effective service.The Court found that the respondent authority failed to consider the reversal of ITC already effected by the petitioner and passed the order mechanically relying only on the provisions of Section 39(9) regarding timing of reversal. This omission led to an erroneous demand for ITC that had already been reversed, effectively causing double payment of tax.Mode of Service of Impugned OrderThe respondent authority contended that uploading the order on the GSTN portal on the date of passing was a valid mode of service under Section 169(d) of the GST Act. The petitioner argued this was insufficient and ineffective as they were unaware of the order, which resulted in delay in filing appeal.The Court recognized the statutory provision deeming such uploading as valid service but also considered the practical impact on the petitioner's right to be heard and file appeal timely. The petitioner's ignorance of the order led to an 86-day delay in appeal filing.Condonation of Delay in Filing AppealThe petitioner sought condonation of delay in appealing against the impugned order. However, the First Appellate Authority rejected the appeal on the ground that it had no power to condone delay under Section 107(4) of the GST Act, which prohibits condonation even if delay is satisfactorily explained.The petitioner challenged this provision as arbitrary, discriminatory, and violative of Articles 14 and 19(1)(g) of the Constitution. While the Court did not expressly strike down the provision, it noted the harshness of the bar on condonation and the resultant prejudice to the petitioner who was unaware of the order due to deficient service.Entitlement and Timing of Reversal of Input Tax CreditThe petitioner claimed ITC on inputs used for manufacture of cotton seed oil, which is taxable, but the by-product cotton oil cake is exempt. The petitioner reversed proportionate ITC attributable to exempt supplies under Section 17(2) in March 2020 returns.The Court examined the amended provisions of Section 16(5) which extended the time limit for claiming ITC for financial years 2017-18 to 2020-21 up to 30.11.2021. However, Section 39(9) prescribes that rectification of returns including reversal of ITC must be done before 30th November following the end of the financial year or actual filing of annual return, whichever is earlier.The petitioner reversed ITC beyond the prescribed time under Section 39(9), but prior to issuance of the show-cause notice. The respondent authority treated this as non-compliance and demanded ITC along with interest and penalty.The Court held that the petitioner's reversal was late but nonetheless effected before show-cause notice. The respondent authority should have treated the delay as a ground for levy of interest and penalty under Section 50, rather than disallowing the reversal and demanding the ITC again, causing double payment.Attachment of Bank Accounts and Recovery ProceedingsThe respondent authority attached the petitioner's Demat and bank accounts for recovery of outstanding dues pursuant to the impugned order. The petitioner challenged the attachment as illegal and arbitrary.Upon deposit of Rs. 5,00,000/- by the petitioner as a sign of bona fide, the Court directed the respondents to lift the attachment of the bank accounts. The Court emphasized the need for due process and proportionality in recovery actions.Failure to Respond to Show-Cause Notice and ConsequencesThe petitioner failed to file any reply to the show-cause notice despite reminders and opportunity. The respondent authority relied on this failure to pass the impugned order.The Court observed that while the petitioner's non-response contributed to the adverse order, the authority's failure to consider the reversal of ITC already effected was a significant error. The order was passed without proper verification of data available on GSTN portal.3. SIGNIFICANT HOLDINGSThe Court held:'In view of the amended provisions of Section 16 (5) of the GST Act, the petitioner is entitled to file returns for claiming Input Tax Credit for financial years 2017-18 to 2020-21 but in the facts of the case, the petitioner has incorrectly claim the Input Tax Credit on the exempted goods which was required to be reversed as per proviso to Section 39 (9) of the GST Act, however, the petitioner has reversed such Input Tax Credit beyond the time prescribed under Section 39 (9) of the GST Act and therefore, the respondent-Authorities without considering the fact that the petitioner has already reversed the Input Tax Credit has again asked the petitioner to reverse the Input Tax Credit resulting into double payment of tax by the petitioner, instead, respondent-Authorities ought to have issued the show-cause notice for interest or penalty to be levied for late reversal of the Input Tax Credit by the petitioner as per the provisions of Section 50 of the GST Act.''The impugned show-cause notice which ought to have been issued for the purpose of levy of interest or penalty for late reversal of Input Tax Credit by the petitioner and not for availing of the Input Tax Credit by the petitioner on the exempted goods. In such circumstances, the respondent-Authority was either required to pass an order to recredit the Input Tax Credit already reversed by the petitioner with retrospective effect or to charge only interest and penalty as per the provisions of the GST Act.''Considering the above discussion regarding the facts emerging from the record and the provisions of the Act, the impugned Order-in-Original is quashed and set aside and the matter is remanded to the respondent-Authority to pass a fresh de-novo order after providing an opportunity of hearing to the petitioner in accordance with law and consider the amount deposited by the petitioner accordingly.'The Court established the principle that reversal of ITC beyond the prescribed time should attract interest and penalty but not double recovery of tax. The authorities must consider actual reversal effected before issuing demand and ensure compliance with principles of natural justice. The mode of service by uploading on portal, while statutorily valid, must be balanced against the right to effective notice and hearing. The appellate authority's bar on condonation of delay under Section 107(4) was noted but not expressly invalidated.