Seeking Refund against the ITC reversal with the direction of the GST audit wing

[THYAGARAJAN KALYANASUNDARAM]

Dear Experts,

One of my clients was audited by the Audit Officials under Section 65 of the GST Act, 2017. While determining the ITC reversal under Rule 42 of the CGST Rules, 2017, the Audit Officials erroneously included not only the ITC availed during the relevant financial year but also the opening balance of ITC carried forward from the previous year. Based on this incorrect computation, and under coercion, my client reversed the amount from the excess ITC available in the Electronic Credit Ledger through Form DRC-03.

Subsequently, during the statutory audit, it was discovered that the reversal had been wrongly computed by including the opening balance of ITC. Accordingly, my client filed a refund application for the erroneous reversal. However, the said refund application was rejected without assigning any reasons.

In these circumstances, kindly advise whether there are judicial precedents (citations) supporting the proposition that ITC reversal cannot be demanded on opening balances carried forward, and whether a writ petition can be filed before the High Court seeking a direction to refund the amount erroneously reversed under the directions of the Audit Officials.  

Thanks in Advance

[Sadanand Bulbule]

1. Erroneous Application of Rule 42: The Authority has erred in applying Rule 42 of the CGST Rules, 2017 to the opening balance of ITC carried forward from earlier years. Rule 42 applies only to current year’s common credit and not to already vested credits.

2. Violation of Vested Right: The ITC carried forward from earlier years is a vested right, as upheld by the Hon’ble Supreme Court in Eicher Motors Ltd. v. Union of India 1999 (1) TMI 34 - Supreme Court and Collector v. Dai Ichi Karkaria Ltd. 1999 (8) TMI 920 - Supreme Court (LB). The demand to reverse such credit is without jurisdiction.

3. Refund Wrongly Rejected: The refund application filed after reversal through DRC-03 was rejected without assigning cogent reasons, making the order a non-speaking order and violative of the principles of natural justice.

4. Coercion in Reversal: The appellant was compelled under coercion and audit pressure to reverse the amount, even though the computation was erroneous. Such coerced reversal is not sustainable in law and must be refunded.

5. Support from Judicial Precedents:

• Filco Trade Centre Pvt. Ltd. v. Union of India (2022 (7) TMI 1232 - SC Order) – Transition and carry forward of ITC is a substantive right.

• Shabnam Petrofils Pvt. Ltd. v. Union of India (2019 (8) TMI 159 - GUJARAT HIGH COURT) – Opening balance ITC cannot be denied unless specifically ineligible.

Please consult the legal experts, if need be.

 

[Ganeshan Kalyani]

If such reversal u/s 42 was not exercised for the previous year, then in my view the reversal is to be carried in the current year. Pls check this.

[THYAGARAJAN KALYANASUNDARAM]

Dear sir,

already reversed previous year and complied rule 42.

[Shilpi Jain]

Rule 42 reversal only on current year ITC.

Can proceed to HC in case amount is significant (considering cost benefit analysis!! otherwise for sure go to HC to get the order quashed)

AI Summary

ITC carried forward: opening balance reversal challenged, refund sought after erroneous GST-rule application under audit direction. Audit officials applied Rule 42 to an opening balance of Input Tax Credit carried forward from earlier years and directed reversal via Form DRC-03, but such carry-forward ITC is a vested right not subject to Rule 42 reversal applicable to current-year credit. The refund filed for the erroneous reversal was rejected without reasons, rendering the order non-speaking; the reversal was effected under audit coercion and precedential authority supports treating transition/carry-forward ITC as substantive rights entitling the taxpayer to seek refund and judicial relief.