High Court sets aside ITC denial order, directs reconsideration pending Supreme Court decision on notification validity

The HC set aside an impugned order dated 30th August, 2024 regarding denial of ITC following challenge to notifications extending time limits for adjudication of show cause notices. The court noted that validity of the impugned notifications was under consideration before SC in a related matter. The department sought reconsideration by the adjudicating authority. The court directed that the matter be reconsidered by the adjudicating authority as captured in the court's earlier order dated 23rd April, 2025, with the validity of notifications remaining subject to SC proceedings. The petition was disposed of accordingly.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

• Whether the impugned notifications No. 09/2023-Central Tax dated 31st March, 2023 and No. 56/2023-Central Tax dated 28th December, 2023, issued under Section 168A of the Central Goods and Services Tax Act, 2017 ("GST Act"), are valid and legally sustainable.
• Whether the procedure mandated under Section 168A of the GST Act, specifically the requirement of prior recommendation by the GST Council before issuance of notifications extending time limits for adjudication, was complied with.
• The legality and validity of the extension of time limits for adjudication of show cause notices and passing of orders under Section 73 of the GST Act and SGST Act for the financial year 2019-20.
• Whether the adjudicating authority erred in denying Input Tax Credit (ITC) claimed by the Petitioner under the IGST Act, 2017, particularly in the context of supplies from SEZ units and the absence of a utility/option in Form GSTR-2A to record such ITC.
• Whether the Petitioners were denied a fair opportunity of personal hearing, resulting in ex-parte adjudication orders imposing huge demands and penalties.
• The impact of ongoing proceedings and conflicting judicial opinions from various High Courts and the Supreme Court on the present petitions.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of the Impugned Notifications under Section 168A of the GST Act

Relevant legal framework and precedents: Section 168A of the GST Act empowers the Central Government to extend the time limit for issuance of show cause notices and adjudication orders, but only upon prior recommendation of the GST Council. The notifications in question purportedly extend such time limits for the financial year 2019-20.

Several High Courts have delivered conflicting judgments on the validity of these notifications. The Allahabad High Court upheld Notification No. 9/2023, the Patna High Court upheld Notification No. 56/2023, whereas the Guwahati High Court quashed Notification No. 56/2023. The Telangana High Court expressed reservations about Notification No. 56/2023 but did not conclusively rule on its validity. These conflicting views have resulted in a Special Leave Petition (SLP) pending before the Supreme Court (S.L.P No 4240/2025).

Court's interpretation and reasoning: The Court acknowledged the cleavage of judicial opinion and the pendency of the Supreme Court's decision on the issue. It noted that Notification No. 9/2023 was issued following the GST Council's prior recommendation, whereas Notification No. 56/2023 was issued without such prior approval and ratified only subsequently, thereby breaching the statutory mandate.

Application of law to facts and treatment of competing arguments: The Court refrained from expressing a definitive opinion on the validity of the notifications, deferring to the Supreme Court's forthcoming ruling. It recognized the importance of judicial discipline and the need to avoid conflicting decisions on the same legal question.

Conclusion: The issue of validity of the impugned notifications remains open and is subject to the Supreme Court's adjudication. Interim orders passed by various High Courts, including the Punjab and Haryana High Court, have been maintained pending the Supreme Court's decision.

Extension of Time Limits for Adjudication under Section 73 of the GST Act

Relevant legal framework: Section 73 of the GST Act deals with determination of tax not paid or short paid or erroneously refunded. The time limit for initiating proceedings under Section 73 is statutorily prescribed and can only be extended under Section 168A, subject to the GST Council's recommendation.

Court's reasoning: The Supreme Court's notice in the SLP highlights the key issue: whether the time limit for adjudication of show cause notices under Section 73 could be validly extended by the impugned notifications. The Court recognized this as a substantial legal question with significant implications for the Petitioners.

Conclusion: The matter is sub judice before the Supreme Court, and the Court declined to interfere with the extension of time limits at this stage.

Denial of Input Tax Credit (ITC) under the IGST Act

Relevant legal framework: The IGST Act, 2017 allows for Input Tax Credit on imports and inward supplies, including those from Special Economic Zone (SEZ) units. Form GSTR-2A is a key document reflecting ITC claimed by taxpayers.

Key evidence and findings: The Petitioner claimed ITC under the IGST Act for the financial year 2019-20 on imports and inward supplies from SEZ units. The adjudicating authority denied this ITC, citing the absence of a utility or option in Form GSTR-2A at the relevant time for recording such ITC.

Court's interpretation and reasoning: The Court found that the denial overlooked the procedural limitations faced by the Petitioner due to the absence of a proper mechanism (utility/option) in Form GSTR-2A to record the ITC. This issue was held to require a detailed hearing on merits.

Application of law to facts: The Court directed that the adjudicating authority reconsider the issue afresh, providing the Petitioner an opportunity for personal hearing and to place their case on merits.

Treatment of competing arguments: The Department argued for upholding the denial of ITC, while the Petitioner contended that the denial was unjustified due to procedural constraints. The Court sided with the Petitioner's right to be heard and to have the matter reconsidered.

Conclusion: The impugned order denying ITC was set aside, and the matter was remanded for fresh adjudication after personal hearing.

Denial of Personal Hearing and Ex-parte Orders

Key findings: The Court noted that in many cases, adjudication orders were passed ex-parte due to the Petitioners' inability to file replies or avail personal hearings. This led to imposition of large demands and penalties without adequate opportunity to defend.

Court's reasoning: Recognizing the fundamental principle of natural justice, the Court emphasized the necessity of affording personal hearings before passing adverse orders.

Directions: The Court ordered that the adjudicating authority issue notices for personal hearings and consider the Petitioner's replies and submissions before passing fresh orders.

Impact of Conflicting Judicial Opinions and Pending Supreme Court Proceedings

Court's approach: The Court acknowledged the conflicting High Court decisions on the validity of the impugned notifications and the pending Supreme Court SLP. It emphasized judicial discipline by refraining from expressing an opinion on the validity of the notifications and deferring to the Supreme Court's decision.

Application to present petitions: The Court disposed of the petitions subject to the outcome of the Supreme Court's ruling, leaving all rights and remedies open to the parties.

3. SIGNIFICANT HOLDINGS

"The validity of the impugned notifications is left open. Any order passed by the Adjudicating Authority shall be subject to the outcome of the decision of the Supreme Court in S.L.P No 4240/2025 titled M/s HCC-SEW-MEIL-AAG JV v. Assistant Commissioner of State Tax & Ors."

"The impugned order dated 30th August, 2024 is set aside and the said issue, as captured by this Court in order dated 23rd April, 2025, shall be considered by the adjudicating authority."

"The adjudicating authority shall issue a notice for personal hearing to the Petitioner... The reply filed by the Petitioner to the SCN along with the submissions made in the personal hearing proceedings shall be duly considered by the Adjudicating Authority and fresh order with respect to the SCN shall be passed accordingly."

Core principles established include:

• The requirement of prior recommendation by the GST Council under Section 168A for extension of time limits is a mandatory procedural safeguard, the breach of which may vitiate notifications.
• Judicial discipline necessitates deferring to the Supreme Court when conflicting High Court opinions exist on substantial questions of law.
• Natural justice mandates that taxpayers be afforded personal hearings before adverse orders are passed, especially where procedural or technical difficulties have impeded their ability to respond.
• Adjudicating authorities must reconsider denials of ITC where procedural limitations have prevented proper recording of such credits, ensuring that merits are examined with due opportunity to the taxpayer.

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