Applicability of First Proviso or Second Proviso to Section 107(11) in Departmental Appeal

[vaibhav agrawal]

 Respected Experts,

A SCN under Section 73 was issued alleging excess ITC availment for FY 2017-18 and FY 2019-20 due to GSTR-3B vs GSTR-2A mismatch. The adjudicating authority dropped the entire demand.

The Department reviewed the order under Section 107(2) and filed an appeal before the Appellate Authority. In Form GST APL-03, the amount under dispute was shown as Rs. 3,36,146 (CGST Rs. 1,68,073 + SGST Rs. 1,68,073), which corresponds only to FY 2017-18.

Personal hearing notices were issued merely fixing dates of hearing. No notice communicated any proposal for reduction of ITC, enhancement of liability, recovery of tax, interest or penalty. The taxpayer appeared and filed written submissions. Discussions during hearing were confined to FY 2017-18.

Subsequently, the Appellate Authority, exercising powers under Section 107(11), set aside the Order-in-Original and confirmed reversal of ITC of Rs. 5,67,732 (FY 2017-18 and FY 2019-20), along with interest and penalty.

In these facts:

1. Is the case governed by the first proviso to Section 107(11) since the appellate order reduced ITC and imposed penalty without giving a reasonable opportunity of showing cause against the proposed order?
2. Is the second proviso to Section 107(11) attracted since the Appellate Authority held that ITC was wrongly availed and confirmed recovery without issuing any separate show cause notice?

1. Does the existence of the original Section 73 SCN and the departmental appeal under Section 107(2) satisfy/dispense with the notice requirement contemplated under the second proviso?
2. Does the fact that the departmental appeal quantified the dispute only for FY 2017-18 have any bearing when the Appellate Authority ultimately confirmed demand for both FY 2017-18 and FY 2019-20?

Which proviso would be applicable in the above facts and why?

[Sadanand Bulbule]

Looking at the facts narrated, your case is covered by Second proviso to Section 107(11). Since there is breach of principles of natural justice by way not providing an opportunity to defend the case, you may file an application for rectification of error under Section 161 or second appeal before GSTAT or writ petition before the High Court.

[KASTURI SETHI]

Himalyan blunders have been committed by the Appellate Authority.

Q. No.1 : Is the case governed by the first proviso to Section 107(11) since the appellate order reduced ITC and imposed penalty without giving a reasonable opportunity of showing cause against the proposed order ?

Reply : YES, Your view is correct.

Q.No.2 Is the second proviso to Section 107(11) attracted since the Appellate Authority held that ITC was wrongly availed and confirmed recovery without issuing any separate show cause notice ?

ReplyYES

Q.No.3 Does the existence of the original Section 73 SCN and the departmental appeal under Section 107(2) satisfy/dispense with the notice requirement contemplated under the second proviso ?

Reply : NO

Q.No. 4 Does the fact that the departmental appeal quantified the dispute only for FY 2017-18 have any bearing when the Appellate Authority ultimately confirmed demand for both FY 2017-18 and FY 2019-20 ?

Reply : The Appellate Authority has power to increase tax, interest and penalty but without issuance of a separate SCN is gross violation of principles of natural justice.

File appeal with GSTAT. The case is not fit for rectification. No hope in getting fair justice in following rectification route. You would get fair justice in GSTAT. No need to file writ petition with High Court. The department shall have no answers.

[YAGAY and SUN]

Yes. On the facts stated, appellate order appears vulnerable under both provisos to Section 107(11), with second proviso being the more directly applicable provision.

First proviso to Section 107(11): Applicable

The Appellate Authority cannot pass an order enhancing penalty or reducing ITC without giving the affected person a rational chance of showing cause against the proposed adverse action. In the present case, the Order-in-Original had dropped the demand, but the Appellate Authority subsequently confirmed ITC reversal of Rs. 5,67,732 & imposed interest and penalty. The hearing notices merely fixed dates of hearing and did not communicate any proposal to reduce ITC or impose penalty. So, statutory requirement of a reasonable opportunity to meet proposed action was not satisfied.

Second proviso to Section 107(11): Clearly attracted

The Appellate Authority exercised powers under Section 107(11) to hold that ITC was wrongly availed and confirmed recovery of tax, interest and penalty. Such action effectively results in reduction of ITC and boost of liability. Before doing so, the taxpayer must be put on specific notice of the proposed enhancement/drop, be given an opportunity to respond. No such notice was issued. Hence, the requirement of the second proviso was not complied with.

Whether the original Section 73 SCN or departmental appeal dispenses with the notice requirement?

No. The original Section 73 SCN ended in an adjudication order dropping the demand. Once AA offers to reverse that outcome and impose adverse consequences, compliance with safeguards under Section 107(11) is independently required. Similarly, the departmental appeal under Section 107(2) is not a substitute for notice planned under provisos.

Effect of appeal being confined to FY 2017-18

This is significant. The APL-03 quantified the dispute only at Rs. 3,36,146 relating to FY 2017-18. Taxpayer was on notice only regarding that period and amount. Confirmation of demand for FY 2019-20 without any specific notice or proposal covering that year, goes beyond scope of appeal, violates principles of natural justice.

To Conclude: Both provisos are attracted; but, the second proviso to Section 107(11) is principal provision applicable because Appellate Authority confirmed recovery by reducing ITC and enhancing liability without issuing a specific notice proposing such action. The limit of the departmental appeal to FY 2017-18 further reinforces challenge to demand confirmed for FY 2019-20.

[YAGAY and SUN]

One additional point that may strengthen the argument: -

where the appellate authority proposes to exercise powers under Section 107(11) in a manner adverse to the taxpayer, the notice must be specific and meaningful, enabling the taxpayer to understand what enhancement, reduction, or recovery is proposed and to what extent. A mere hearing notice or a general opportunity of personal hearing is ordinarily distinguishable from a statutory opportunity to show cause against a proposed enhancement/reduction.

Accordingly, your strongest grounds are:

1. Violation of the second proviso to Section 107(11) - recovery confirmed without a specific notice proposing reduction of ITC/enhancement of liability.
2. Violation of the first proviso to Section 107(11) - ITC reduced and penalty imposed without an opportunity to show cause against the proposed adverse order.
3. Exceeding the scope of the departmental appeal - APL-03 disputed only FY 2017-18 (Rs. 3,36,146), yet the appellate order confirmed liability for FY 2019-20 as well.
4. Breach of natural justice - the taxpayer was never put on notice that FY 2019-20 would be adjudicated adversely at the appellate stage.

These grounds can be urged cumulatively before the appellate forum/court to challenge the sustainability of the appellate order.

[Kashish Gupta]

1. Presuming that neither appeal memorandum nor APL-03 gives reference to FY 2019-20.

1.1 In this case, appellate authority had no jurisdiction at all to pass any order qua FY 2019-20 as the appeal has only been filed against FY 2017-18. Therefore, the question of applicability of first and second proviso to Section 107(11) of the CGST Act, if at all to arise, can arise qua appeal filed for FY 2017-18; it cannot arise qua FY 2019-20 as there is no appeal filed for said year. Above response is advised with a presumed understanding that subordinate officer didn't file appeal qua FY 2019-20 before first appellate authority.

1.2 The most significant ground of challenge in your case is that the departmental appeal challenged only to FY 2017-18 whereas the Appellate Authority confirmed demand for both FY 2017-18 and FY 2019-20. The Appellate Authority derives its jurisdiction from the appeal filed before it. When the Department filed Form GST APL-03 disputing only at Rs. 3,36,146 pertaining to FY 2017-18, the Appellate Authority's jurisdiction was limited to that dispute. The question of FY 2019-20 was not posed before the Appellate Authority. Confirming a demand of Rs. 5,67,732 covering FY 2019-20 is a substantial lapse and a jurisdictional error. The Appellate Authority had no competence to adjudicate a year that is not a subject matter in the appeal filed before it by the department.

2. Now, if it is to be presumed that appeal was filed against an order dropping demand for both FYs and the period in dispute mentioned in APL-03 was also both FYs and the error is made only in mentioning the disputed amount in Form APL-03.

2.1 Then first proviso to Section 107(11) is not attracted as it states "reducing the amount of refund or input tax credit", which is not the issue here as per the facts stated by you. Second proviso will also not apply as the error seems to have been made only in mentioning amount in dispute in Form APL-03.

[Kashish Gupta]

3. Presuming that department did not dispute ITC qua FY 2019-20 and has mentioned the said FY in disputed period.

3.1 When the Appellate Authority independently forms an opinion under Section 107(11) that ITC was wrongly availed, it is required to issue a fresh notice in its own right to the assessee. The departmental appeal in Form GST APL-03 similarly cannot substitute for this notice, as it is a filing by Department challenging the adjudication order and is not a notice issued by the Appellate Authority to the assessee.

3.2 The Calcutta High Court in Rajesh Joysowal v. The State of West Bengal and Others, reported as 2025 (8) TMI 1448 directly supports the position taken above. In that case, the Appellate Authority had suo motu added back a demand that was dropped by the adjudicating authority and also fastened fresh liability on account of belated reversal of ITC, without issuing any show cause notice. The Hon'ble High Court held that the procedure adopted by the Appellate Authority was not sustainable, and that if the Appellate Authority was of the view that any demand ought to have been made, an opportunity ought to have been afforded to the petitioner by issuing a separate show cause notice in terms of the second proviso to Section 107(11). The demand added by the Appellate Authority was accordingly set aside.

AI Summary

Input tax credit appellate notice requirements and jurisdictional limits under GST determine whether adverse variation is sustainable.
Application of the first and second provisos to Section 107(11) depends on whether the Appellate Authority proposes to reduce input tax credit, enhance liability, or confirm recovery without a specific opportunity to show cause. Mere hearing notices do not satisfy that safeguard. The appellate jurisdiction is confined to the subject matter and period placed in dispute in the departmental appeal, and confirmation of demand beyond that scope raises a jurisdictional objection. The original show cause notice and departmental appeal do not substitute for a fresh notice before an adverse appellate order.