HC cancels ITC reversal due to GSTR mismatches, emphasizes compliance with amended Section 16(2) clauses (2)

The HC set aside the impugned assessments reversing input tax credit (ITC) due to mismatches between Forms GSTR 2A and GSTR 3B, recognizing that GSTR 3B was initially a temporary summary return without invoice-level details. The court noted the non-operational status of GSTR 2 and 3 and referenced SC precedent affirming that ITC remains intact in the electronic credit ledger despite discrepancies. The HC held that claim of ITC is subject to compliance with amended Section 16(2) clauses. The writ petitions were disposed of with directions to the tax authorities to reconsider ITC claims per relevant circulars and statutory amendments, allowing petitioners a reasonable hearing within four months from the web copy upload, without awaiting certified copies.

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1. ISSUES PRESENTED and CONSIDERED

1. Whether a demand for reversal of input tax credit (ITC) can be sustained solely on the ground of mismatch between Form GSTR-2A and Form GSTR-3B of a taxpayer.

2. Whether the non-operationalization of statutory returns in Form GSTR-2, GSTR-1A, and GSTR-3 affects the validity of proceedings denying ITC on the basis of mismatch between GSTR-3B and GSTR-2A.

3. What is the proper mechanism for resolving discrepancies between ITC claimed in Form GSTR-3B and that reflected in Form GSTR-2A?

4. Whether procedural requirements prescribed by the Board in Circulars 183/15/2022-GST and 193/05/2023-GST have been followed by the revenue authorities in disallowing ITC.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Demand for Reversal of ITC Solely on Mismatch Between Form GSTR-2A and Form GSTR-3B

Legal Framework and Precedents:

- Section 16(1) of the CGST Act entitles a registered person to take credit of input tax charged on goods or services used in the course or furtherance of business.

- Section 16(2) imposes conditions for availing ITC, including possession of tax invoice, receipt of goods/services, furnishing of returns, and payment of tax by the supplier (Section 16(2)(c)).

- Section 41 provides for provisional credit based on self-assessment by the recipient, which overrides Section 16(2)(c) to an extent.

- Originally, Sections 37, 38, and 42 and Rules 69-72 provided for a system-based matching mechanism for ITC verification, which was omitted effective 1.10.2022.

- Supreme Court judgment held that registered persons are obliged to maintain books and self-assess ITC and output tax liability; non-operability of GSTR-2A does not absolve them from this duty.

Court's Interpretation and Reasoning:

- The legislative scheme envisaged a system-based matching mechanism to ensure seamless ITC flow, but this mechanism was never operationalized and later omitted.

- In the absence of the system-based matching mechanism, Section 16(2)(c) yields to Section 41, allowing provisional credit to recipients even if suppliers have not paid tax.

- ITC availed provisionally by recipients remains intact unless disallowed after due process; reversal solely on mismatch between GSTR-2A and GSTR-3B without following prescribed procedure is not sustainable.

- The Supreme Court clarified that the common portal is a facilitator, and self-assessment is primarily based on books of accounts and records maintained by the registered person.

Key Evidence and Findings:

- Petitioners had mismatches between GSTR-2A and GSTR-3B but furnished Chartered Accountant certificates as per Circular No.183/15/2022-GST for part of the claimed ITC.

- The appellate authority partially allowed ITC based on such certificates but confirmed reversal for the remaining amount.

Application of Law to Facts:

- The absence of a system-based matching mechanism means that mismatch alone cannot be a ground for reversal unless the procedure prescribed by law and circulars is followed.

- The petitioners' provisional ITC claim, supported by certificates, is prima facie valid and cannot be disallowed without affording opportunity to comply with procedural safeguards.

Treatment of Competing Arguments:

- Revenue argued that ITC is a concession subject to conditions and restrictions and that mismatch indicates non-payment by suppliers, justifying reversal.

- Petitioners contended that without the matching mechanism and proper procedure, reversal on mismatch alone is unjustified.

- Court favored petitioners' view based on statutory scheme, judicial precedents, and Board's circulars.

Conclusion:

- Demand for reversal of ITC solely on mismatch between GSTR-2A and GSTR-3B is not sustainable without adherence to prescribed procedures and opportunity to produce evidence/certificates.

Issue 2: Effect of Non-Operationalization of Returns in Form GSTR-2, GSTR-1A, and GSTR-3 on ITC Denial Proceedings

Legal Framework and Precedents:

- Initially, the GST law envisaged automated returns and matching through Forms GSTR-1, 2, 2A, and 3 to facilitate ITC verification.

- Due to technical difficulties, Form GSTR-3B was introduced as a stopgap summary return without invoice-wise details.

- Rule 61(5) retrospectively regularized GSTR-3B as a specified return under Section 39.

- Supreme Court judgment held that registered persons must maintain books and self-assess ITC and output tax liability irrespective of non-operability of statutory forms.

Court's Interpretation and Reasoning:

- Non-operability of Forms GSTR-2, 2A, and 3 does not affect the obligation of registered persons to maintain records and self-assess ITC.

- Form GSTR-3B, though a stopgap, is a valid return under Section 39 and Rule 61(5) and suffices for ITC claim and tax payment.

- The registered person's self-assessment and maintenance of books are the primary basis for ITC claim, not the electronic auto-populated data.

Key Evidence and Findings:

- Petitioners relied on GSTR-3B returns filed and claimed ITC accordingly.

- Revenue's reliance on mismatch with GSTR-2A, which was non-operational or incomplete, was rejected as a ground for denial of ITC.

Application of Law to Facts:

- Since statutory forms were not operational, reliance solely on mismatch with GSTR-2A is misplaced.

- Petitioners' returns in GSTR-3B and maintenance of books are sufficient for ITC claim.

Treatment of Competing Arguments:

- Revenue argued that mismatch indicates non-payment by suppliers and justifies ITC denial.

- Petitioners argued that non-operability of statutory forms and reliance on GSTR-3B is valid.

- Court upheld petitioners' position based on Supreme Court precedent and statutory amendments.

Conclusion:

- Non-operability of statutory returns in Forms GSTR-2, 2A, and 3 does not invalidate ITC claims filed through Form GSTR-3B or justify denial on mismatch grounds.

Issue 3: Mechanism for Resolving Discrepancies Between GSTR-2A and GSTR-3B ITC Claims

Legal Framework and Circulars:

- Circular No. 183/15/2022-GST and Circular No. 193/05/2023-GST issued by CBIC under Section 168(1) of the CGST Act provide detailed procedure for resolving discrepancies between ITC claimed in GSTR-3B and reflected in GSTR-2A.

- The circulars specify scenarios of mismatch, including non-filing of GSTR-1 by supplier, wrong classification of supplies, and incorrect GSTIN reporting.

- The procedure requires the proper officer to notify the registered person of discrepancies and to require production of certificates from Chartered Accountant or supplier depending on the amount of discrepancy.

- Rule 36(4) of CGST Rules limits ITC availed in excess of that reflected in GSTR-2A to prescribed percentages for specified periods.

Court's Interpretation and Reasoning:

- The circulars are binding clarifications to ensure uniform implementation of ITC provisions and prescribe mandatory steps for revenue authorities before disallowing ITC on mismatch grounds.

- The proper officer has a mandatory duty to inform the taxpayer of discrepancies and the procedure for resolution, including certificate production.

- Failure to follow these procedures amounts to procedural arbitrariness and vitiates the assessment orders.

Key Evidence and Findings:

- In the present cases, no express and separate intimation was given to petitioners about the discrepancy resolution mechanism and certificate requirements.

- Petitioners had furnished Chartered Accountant certificates for part of the discrepancy, which was accepted by appellate authority.

Application of Law to Facts:

- Since the revenue authorities failed to comply with the mandatory procedural steps prescribed in the circulars, the impugned orders reversing ITC are liable to be set aside.

- Petitioners must be afforded opportunity to comply with the circulars' procedure before any final disallowance.

Treatment of Competing Arguments:

- Revenue contended that mismatch justifies immediate reversal of ITC.

- Petitioners emphasized mandatory procedural safeguards and opportunity to produce evidence.

- Court held that procedural compliance is essential and non-adherence invalidates the orders.

Conclusion:

- Discrepancies between ITC claimed in GSTR-3B and reflected in GSTR-2A must be resolved in accordance with Circulars 183/15/2022-GST and 193/05/2023-GST, including mandatory intimation and certificate production.

- Failure to follow this procedure renders the assessment orders unsustainable.

Issue 4: Procedural Compliance by Revenue Authorities in ITC Disallowance Proceedings

Legal Framework:

- Circular No. 183/15/2022-GST mandates that the proper officer "shall ask" the registered person to produce certificates from Chartered Accountant or supplier based on the amount of discrepancy.

- The circular places onus on the proper officer to expressly intimate the taxpayer of the discrepancy and the procedure for resolution.

Court's Interpretation and Reasoning:

- The mandatory language "shall ask" imposes a clear duty on the proper officer to notify and assist the taxpayer in resolving discrepancies.

- In the absence of such express intimation and opportunity, the assessment orders are procedurally defective and arbitrary.

Key Evidence and Findings:

- No separate and express intimation regarding discrepancy resolution and certificate requirements was issued to the petitioners in the impugned proceedings.

Application of Law to Facts:

- The failure of the revenue authorities to comply with the procedural safeguards prescribed by the Board vitiates the impugned orders.

Treatment of Competing Arguments:

- Revenue did not demonstrate adherence to prescribed procedure.

- Petitioners relied on procedural lapses to challenge the orders.

- Court accepted petitioners' submissions on procedural non-compliance.

Conclusion:

- Procedural non-compliance by revenue authorities in ITC disallowance proceedings on mismatch grounds warrants setting aside of such orders and reconsideration in accordance with prescribed procedures.

Additional Observations

- The GST Council acknowledged that ITC flow should not be restricted due to non-payment of tax by suppliers except in exceptional cases (e.g., missing suppliers, closure of business).

- Amendments to Section 16(2) by insertion of clauses (aa) and (ba) and amendment to clause (c) emphasize compliance with supplier's furnishing of details in GSTR-1 and communication in GSTR-2B as preconditions for ITC from 1.1.2022 onwards.

- The present batch of petitions concerns periods prior to 2022, where the earlier regime with provisional credit under Section 41 and absence of matching mechanism applies.

- The Court granted liberty to revenue authorities to reconsider ITC claims in accordance with Circulars 183 and 193 and relevant statutory provisions after affording reasonable opportunity of hearing.

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