Input Tax Credit Verification Requires More Than Return Mismatch and Demands Must Stay Within Show-Cause Notice Limits
Input tax credit demands must remain confined to the tax heads, amounts and grounds set out in the show-cause notice under Section 75(7). A GSTR-2A and GSTR-3B mismatch warrants scrutiny but does not, without invoice-level and transaction-based verification, establish wrongful availment or supplier non-payment of tax. Section 16(2)(aa) does not apply retrospectively to Financial Year 2019-20, while Rule 36(4) and prescribed verification mechanisms must be applied according to their relevant periods. Interest and penalty depend on a valid tax determination. A speaking order must address reconciliations, evidence, computations and submissions, with reconsideration limited to the existing notice after effective hearing.
Issues: (i) Whether the demand could be confirmed under CGST and SGST heads and on a computation not proposed in the show-cause notice? (ii) Whether a GSTR-2A and GSTR-3B mismatch, without verification of underlying transactions, established wrongful availment of input tax credit for Financial Year 2019-20? (iii) Whether Section 16(2)(c), Section 16(2)(aa), Rule 36(4), and the applicable CBIC Circulars were correctly applied to the relevant periods? (iv) Whether the interest and penalty could survive independently of the underlying tax demand? (v) Whether the orders satisfied the requirement of a reasoned, speaking order and what consequential relief followed?
Issue (i): Whether the demand could be confirmed under CGST and SGST heads and on a computation not proposed in the show-cause notice?
Analysis: The scrutiny intimation, pre-notice intimation, and show-cause notice quantified the alleged excess credit solely under the IGST head. The final order instead confirmed CGST and SGST demands derived from a separate working that was not reconciled with the primary reconciliation and was incorrectly attributed to the registered person's reply. Section 75(7) confines confirmation to the amount, heads, and grounds specified in the notice. The relevant records did not explain the shift from IGST to CGST and SGST or the derivation of the latter figures.
Conclusion: The CGST and SGST demand confirmed on a basis outside the show-cause notice and without resolving the conflicting computations was unsustainable.
Issue (ii): Whether a GSTR-2A and GSTR-3B mismatch, without verification of underlying transactions, established wrongful availment of input tax credit for Financial Year 2019-20?
Analysis: A return mismatch can warrant scrutiny and verification, but it does not itself establish that tax was not paid by suppliers or that credit was wrongly availed. Eligibility requires examination of invoices, receipt of goods, purchase records, books of account, electronic credit ledger, and, where required, supplier compliance. The primary reconciliation disclosed an IGST difference while showing no CGST or SGST excess against the registered person.
Conclusion: A GSTR-2A and GSTR-3B mismatch alone was not conclusive proof of inadmissible input tax credit.
Issue (iii): Whether Section 16(2)(c), Section 16(2)(aa), Rule 36(4), and the applicable CBIC Circulars were correctly applied to the relevant periods?
Analysis: Section 16(2)(c) required actual payment of tax, but its breach could not be inferred without factual verification. Section 16(2)(aa), effective from 01.01.2022, did not govern Financial Year 2019-20. Rule 36(4) did not apply from April to September 2019 and applied thereafter only in its contemporaneous form. Circular No. 183/15/2022-GST, as extended by Circular No. 193/05/2023-GST, applied the stated verification mechanism only from April 2019 to 8 October 2019; the later period required independent examination under the applicable substantive law.
Conclusion: The statutory conditions and Circulars were not applied according to their temporal operation, and the claimed credit required period-wise verification.
Issue (iv): Whether the interest and penalty could survive independently of the underlying tax demand?
Analysis: Interest under Section 50 and penalty under Section 73(9) are consequential to a valid determination of tax liability. Since the tax computation had not been lawfully established, neither consequential liability had an independent basis.
Conclusion: Interest and penalty could not independently survive and had to depend on the fresh tax determination.
Issue (v): Whether the orders satisfied the requirement of a reasoned, speaking order and what consequential relief followed?
Analysis: The orders did not address the primary reconciliation, the source of the alternate working, the change in tax heads, or the explanation and supporting material. Section 75(6) requires the relevant facts and basis of decision to be stated. A proper determination required reconciliation of both workings, invoice-wise and, where necessary, supplier-wise verification, an effective opportunity of hearing, and a determination confined to the existing show-cause notice.
Conclusion: The orders failed the requirement of a reasoned, speaking determination; the disputed liability must be reconsidered within the limits of the notice after proper verification and hearing.
Final Conclusion: The prior tax computation, and its consequential liabilities, lacked a sustainable factual and statutory foundation; a fresh determination is required without enlarging the allegations or tax heads contained in the notice.
Ratio Decidendi: A GSTR-2A mismatch cannot alone establish wrongful availment of input tax credit, and a tax demand must remain confined to the heads, amount, and grounds stated in the show-cause notice and be supported by a reasoned factual determination.