GST Demands Must Rest on Verified Tax Liability, Not Mere Return Mismatches

Differences in GST Returns Do Not Necessarily Establish Tax Liability

Under the GST system, the Department regularly compares figures reported in different statutory returns to identify possible short payment of tax or excess availment of Input Tax Credit (ITC). Forms GSTR-3B, GSTR-2A, GSTR-9 and GSTR-9C provide important information for this purpose. However, a difference between figures appearing in two returns does not automatically mean that the taxpayer has paid less tax or claimed excess ITC. Such differences may arise from credit reversals, accounting adjustments or the different purposes for which these returns are prepared. Therefore, the Department must verify the actual position before raising or confirming a demand.

For example, a taxpayer may initially avail ITC in Form GSTR-3B and subsequently reverse part of that credit in the same return. If the Department compares only the gross ITC with Form GSTR-2A without considering the reversal, it may incorrectly conclude that the taxpayer claimed excess credit. Similarly, a difference between Forms GSTR-9 and GSTR-9C may arise from reconciliation adjustments rather than unpaid tax. Where a taxpayer makes both taxable and exempt supplies, it is also necessary to distinguish credit relating exclusively to particular supplies from common credit before calculating the reversal required under Rules 42 and 43 of the CGST Rules, 2017.

The GST Appellate Tribunal, Lucknow Bench, addressed these issues in NITIN BAKERS PRIVATE LIMITED Versus VIJAY SINGH VISEN, DEPUTY COMMISSIONER, KANPUR & ORS. - 2026 (10) TMI 1629 - GSTAT LUCKNOW. The Tribunal examined three separate demands relating to alleged excess ITC, differences between annual return and reconciliation figures, and short reversal of common credit. The central question was whether the Tribunal could sustain tax demands based solely on return discrepancies without examining the underlying records, adjustments, and actual tax liability.

A Return Discrepancy Led to a Demand Exceeding Rs. 56 Lakh

Nitin Bakers Private Limited, which manufactures and sells bakery products, including bread, buns, and rusk, reported a total turnover of approximately Rs. 5.97 crore during FY 2018-19. Of this, approximately Rs. 5.59 crore represented exempt supplies and Rs. 37.67 lakh represented taxable supplies attracting GST at 5%.

During scrutiny under Section 61 of the CGST/UPGST Act, 2017, the Department noticed discrepancies in ITC availment, tax liability reconciliation, and reversal of credit attributable to exempt supplies. An ASMT-10 notice was issued on 21.11.2023, followed by a show cause notice under Section 73 on 23.12.2023. The principal disputed amounts were Rs. 2,589.62 towards alleged excess ITC Rs. 25,93,217.12 arising from differences between GSTR-9 and GSTR-9C, and Rs. 51,756.66 towards alleged short reversal under Rules 42 and 43.

The Proper Officer passed an ex parte Order-in-Original dated 18.04.2024, confirming a total demand of Rs. 56,24,458.40, comprising tax of Rs. 26,47,563.40, interest of Rs. 26,62,217 and penalty of Rs. 3,14,678. The First Appellate Authority dismissed the taxpayer's appeal ex parte on 22.02.2025 after the taxpayer failed to appear despite being given opportunities to be heard. The taxpayer thereafter approached the GSTAT, challenging the absence of proper verification and reconciliation.

Gross ITC Figures Cannot Replace Verification of Net Credit

The first dispute concerned alleged excess ITC of Rs. 2,589.62, determined by comparing credit reported in Form GSTR-3B with Form GSTR-2A. The Department treated the difference as excess availment without adequately considering credit already reversed in Form GSTR-3B.

The Tribunal examined the figures appearing in Table 4 of GSTR-3B. The records showed gross ITC of Rs. 2,94,224.62 under IGST and Rs. 9,30,475.21 each under CGST and SGST. However, the corresponding reversals were Rs. 5,15,589 under IGST Rs. 12,15,705 under CGST and Rs. 12,17,559 under SGST. Thus, the reported reversals exceeded the gross credit figures under the respective tax heads.

The Tribunal held that the Department could not determine excess ITC merely by comparing gross figures while ignoring reversals already reflected in statutory returns. It referred to M/s. Manoja Kumar Nayak and M/s. Babamani Roadways & Borewells Versus Commissioner Goods and Services Tax and Central Excise, Rourkela, Additional Commissioner Goods and Services Tax and Central Excise Rourkela, Superintendent, Anti-Evasion Goods and Services Tax and Central Excise Rourkela Commissionerate, Assistant Commissioner, Goods and Services Tax and Central Excise, Angul, Superintendent Goods and Services Tax and Central Excise, Angul. - 2026 (4) TMI 784 - ORISSA HIGH COURT, and M/s. Oasys Cybernetics Private Limited Represented by its Managing Director Mr. Elango Versus State Tax Officer, Chennai - 2024 (4) TMI 770 - MADRAS HIGH COURT , while emphasising the need to determine the actual net credit position.

The important distinction is between identifying a mismatch and establishing an inadmissible credit claim. A mismatch may justify further examination, but a demand requires verification of whether credit was actually retained or utilised contrary to law. Where an amount has already been reversed, that adjustment must be considered to avoid demanding the same amount again.

Differences Between GSTR-9 and GSTR-9C Do Not Automatically Establish Unpaid Tax

The largest disputed amount Rs. 25,93,217.12, arose from a difference between Table 9 of Form GSTR-9 and Table 9P of Form GSTR-9C. The Department treated the variance as short payment of output tax.

The taxpayer explained that the figures represented different reporting elements. According to its submissions, one reflected tax paid through returns, including the effect of ITC reversals, while the other reflected tax payable on outward supplies. The taxpayer also relied upon the explanation furnished in Table 10 of GSTR-9C. It maintained that the difference was a reconciliation adjustment, not an outstanding tax liability.

The Tribunal found that the Proper Officer had treated the reconciliation difference as short-paid tax without examining the underlying transactions. It held that actual tax liability must be determined from sales ledgers, tax invoices, financial books and relevant return entries, rather than a mechanical comparison of two portal figures. The matter therefore required fresh verification.

This distinction has considerable practical importance. Forms GSTR-9 and GSTR-9C serve related but different reporting and reconciliation purposes. A difference between their figures may indicate an error, adjustment or genuine tax shortfall. Only after examining the nature of the entries and reconciling them with the underlying records can the correct conclusion be reached.

Reversal Under Rules 42 and 43 Requires Identification of Common Credit

The third dispute concerned an alleged short reversal of ITC amounting to Rs. 51,756.66 under Rules 42 and 43 of the CGST Rules, 2017. As the taxpayer made both taxable and exempt supplies, the Department examined the reversal of credit attributable to exempt supplies.

The taxpayer submitted that it had already reversed Rs. 19,75,422.62, as reflected in Form GSTR-9, while total reversals reported in Table 4(B) of Form GSTR-3B amounted to Rs. 29,48,853. However, the Department proceeded on the basis that an additional reversal was required.

The Tribunal found a fundamental defect in the Department's computation. The entire ITC had been treated as common credit without first identifying credit attributable specifically to taxable supplies, exempt supplies, and the common category. The Tribunal held that a valid determination under Rules 42 and 43 required segregating specific and common credit, then applying the prescribed proportion relating to exempt and taxable turnover.

This reasoning reflects an important statutory principle. Credit exclusively attributable to taxable supplies cannot automatically be included in the common-credit pool merely because the taxpayer also makes exempt supplies. Similarly, credit exclusively attributable to exempt supplies must be dealt with according to the applicable restrictions. Only properly identified common credit is subjected to the relevant proportional calculation.

The Tribunal also considered the need to reconcile reversals already made. The existence of substantial reversals did not, by itself, conclusively establish full compliance with Rules 42 and 43. However, the Tribunal could not ignore those reversals when calculating any further liability. The correct amount, if any, had to be determined by the prescribed computation, supported by records.

Ex Parte Proceedings Do Not Dispense With Proper Examination of Records

Both the Original Adjudicating Authority and the First Appellate Authority had proceeded ex parte. The Department emphasised that the taxpayer failed to appear and furnish supporting evidence despite opportunities, including four hearings before the First Appellate Authority.

The Tribunal nevertheless found that the disputed demands had been confirmed without substantive reconciliation of the relevant statutory returns and primary accounting records. It considered that, before determining any final liability, the discrepancies required examination of the actual transactions, credit reversals, and tax computations.

Non-appearance by a taxpayer does not convert an unexplained return difference into an established tax liability. At the same time, the taxpayer remains responsible for producing the records necessary to substantiate its claims. These responsibilities are complementary: the taxpayer must provide relevant evidence, and the Proper Officer must examine that evidence and determine liability in accordance with law.

The Tribunal's approach therefore did not relieve the taxpayer of its statutory obligations. Instead, it required a proper adjudication based upon verifiable facts rather than unexamined return comparisons.

Remand Requires Fresh Verification Rather Than Automatic Cancellation of Liability

A significant aspect of the judgment is the distinction between setting aside an inadequately verified demand and finally deciding that no tax is payable.

The Tribunal identified defects in how it determined the three demands. It did not, however, undertake a final invoice-wise determination of admissible ITC, actual output tax liability or the precise reversal required under Rules 42 and 43. These matters involved examination of primary documents and detailed computations.

Accordingly, the Tribunal considered fresh adjudication necessary. The Proper Officer was required to verify the relevant invoices, accounting ledgers, statutory returns and reversal calculations. The Tribunal also directed the taxpayer to furnish the documents necessary for proper verification.

A remand does not amount to a final declaration that the taxpayer has no liability. It restores the matter for a lawful determination after the deficiencies identified in the earlier proceedings have been addressed. Any fresh demand must therefore rest upon verified facts and the applicable statutory provisions.

Proper Verification and Reconciliation Are Essential Before Confirming a GST Demand

The GSTAT allowed the taxpayer's appeal by way of remand and set aside the Order-in-Appeal dated 22.02.2025 and the Order-in-Original dated 18.04.2024. These orders had confirmed a total demand of Rs. 56,24,458.40, comprising tax of Rs. 26,47,563.40, interest of Rs. 26,62,217 and penalty of Rs. 3,14,678. The Tribunal directed fresh adjudication after proper verification of the records.

The Tribunal identified three distinct discrepancies requiring fresh examination:

1. Excess ITC of Rs. 2,589.62: The difference between GSTR-3B and GSTR-2A required verification of the gross ITC availed, reversals already made and the resulting net credit position.
2. Tax difference of Rs. 25,93,217.12: The difference between Table 9 of GSTR-9 and Table 9P of GSTR-9C required verification of the reported tax figures, reconciliation adjustments and actual tax liability with reference to invoices and books of account.
3. Short ITC reversal of Rs. 51,756.66: The alleged short reversal under Rules 42 and 43 required verification of the specific and common credit, computation of the reversal attributable to exempt supplies and adjustments for reversals already made.

The Tribunal did not finally hold that no tax was payable. It left the Proper Officer to determine the actual liability, if any, afresh. The judgment establishes that differences in statutory returns may justify scrutiny, but confirmation of a tax demand requires proper verification of the underlying records, relevant adjustments, and applicable statutory provisions.

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