Defective show cause notice defeats input tax credit reversal and penalty where the core factual basis was never addressed.

The reversal of input tax credit and the associated penalty were unsustainable because the show cause notice and assessment orders proceeded on a different premise from the assessee's consistent defence. The notice assumed the credit for windmill spares related to exempt electricity sales, while the assessee stated it was adjusted against VAT on the sale of old windmills. This core objection was not addressed in the notice, assessment, or appellate order, and a prior remand had not cured the defect. Any fresh notice to rectify the mismatch was also barred by limitation under the statutory scheme governing wrongful input tax credit reversal.

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Issues: Whether the reversal of input tax credit and the consequential penalty levied on the assessee were liable to interference in view of the defective show cause notice, the assessee's claim that the credit was adjusted against VAT on sale of old windmills, and the bar of limitation on issuing any fresh notice.

Analysis: The assessment was challenged on the footing that the notice and the consequential orders proceeded on an incorrect premise, namely that the credit claimed for windmill spares was linked to exempt electricity sales, whereas the assessee's case throughout was that the credit had been adjusted against VAT payable on the sale of old windmills. The notice, the assessment order, and the appellate order did not address this core objection. The earlier remand was intended to secure a speaking order after considering the reply, but the fresh assessment continued to rest on an unconnected ground and did not cure the basic mismatch between the notice and the final reasoning. In these circumstances, any further attempt to correct the defect would require a fresh show cause notice, but such action was held to be barred by limitation under the statutory scheme governing reversal of wrongly availed input tax credit.

Conclusion: The reversal of input tax credit and the penalty could not be sustained, and interference was warranted in favour of the assessee.

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