The Madras High Court has upheld GST proceedings initiated refusing to interfere with an adjudication order confirming reversal of ₹92.29 crore of allegedly ineligible ITC along with interest and penalty.
The bench of Justice C. Saravanan, while dismissing the writ petition, held that the taxpayer could not challenge the invocation of Section 74 of the CGST Act merely because it had informed the department about its intention to avail ITC after the Orissa High Court’s decision in Safari Retreats.
The bench observed that the taxpayer had ultimately availed ITC far beyond the amount disclosed in its representation and without obtaining any approval from the department.
The dispute arose from an Order-in-Original dated 4 February 2025, whereby the GST authorities confirmed a demand relating to ITC claims on construction-related goods and services.
Initially, the department issued a show cause notice proposing recovery of ₹103.45 crore of allegedly ineligible ITC, together with interest and penalty under Section 74 of the CGST Act. During the proceedings, the adjudicating authority ultimately confirmed a demand of ₹92.29 crore, while dropping the balance demand of about ₹11.16 crore. The order also appropriated ITC already reversed by the company through DRC-03 and subsequent GSTR-3B reversals against the confirmed liability.
The petitioner is engaged in the business of renting and leasing immovable properties. It had claimed ITC on several categories of inputs and input services used in constructing commercial buildings, including Construction materials; Capital goods used in construction; Plumbing and sanitary materials; Electrical and electronic goods installed in buildings; and Architectural, construction, labour contract, works contract and marketing services.
The company relied on the 2019 judgment of the Orissa High Court in Safari Retreats Pvt. Ltd., which had interpreted Section 17(5)(d) in favour of allowing ITC where buildings were constructed for taxable renting activities.
After the Orissa High Court judgment, the company wrote to the GST department on 16 August 2019, informing it that it intended to avail ITC in accordance with the ruling.
The communication indicated a proposed ITC claim of approximately ₹22.51 crore for the relevant periods. However, according to the High Court, no approval or concurrence was ever granted by the department in response to that representation.
The Court noted that although the initial proposal was to claim around ₹22.51 crore, the company eventually availed ITC aggregating ₹103.45 crore for the period from July 2017 to July 2021.
Subsequently, the taxpayer reversed ₹89.07 crore under protest, comprising: ₹62.83 crore through DRC-03 for July 2017 to July 2021; and ₹26.24 crore through GSTR-3B reversals for August 2021 to September 2022.
Nevertheless, the adjudicating authority confirmed the remaining demand together with interest and penalty.
Before the High Court, the petitioner argued that invocation of Section 74, which applies only in cases involving fraud, wilful misstatement or suppression of facts, was unjustified.
The company relied upon the fact that it had voluntarily informed the department about its intention to claim ITC as early as August 2019. It also referred to CBIC Instruction No. 05/2023, which clarifies that Section 74 cannot be invoked merely because tax has not been paid, unless there is evidence of fraud or suppression.
The petitioner further argued that the department lacked the foundational facts necessary to invoke the extended limitation period and challenged the issuance of a consolidated notice covering multiple tax periods.
The GST department maintained that the communication dated 16 August 2019 could not shield the taxpayer from proceedings under Section 74.
According to the department, the taxpayer had availed blocked ITC contrary to Sections 17(5)(c) and 17(5)(d) of the CGST Act, failed to disclose the ineligible credit correctly in its GST returns and wrongly claimed construction-related ITC despite the statutory restrictions.
The department also pointed out that the Supreme Court had subsequently reversed the Orissa High Court’s decision in Chief Commissioner of CGST v. Safari Retreats (P) Ltd., thereby removing the very foundation of the petitioner’s claim.
The bench rejected the petitioner’s contentions and upheld the adjudication proceedings.
The Court observed that mere submission of a representation seeking approval could not create any legitimate expectation when the department had never granted approval to avail the credit.
The Court emphasised that the taxpayer had initially proposed to claim only around ₹22.51 crore, but eventually availed more than ₹103 crore in blocked credit without departmental concurrence.
According to the Court, these facts justified invocation of the extended limitation period under Section 74.
The Court further held that the taxpayer’s reliance on the Orissa High Court judgment could no longer survive after the Supreme Court’s authoritative decision in Chief Commissioner of Central Goods and Services Tax v. Safari Retreats (P) Ltd., which upheld the constitutional validity of Sections 17(5)(c) and 17(5)(d).
The Supreme Court had clarified that ITC is purely a statutory benefit; parliament is competent to carve out exceptions restricting ITC; clauses (c) and (d) of Section 17(5) are constitutionally valid; and whether a building qualifies as “plant” depends upon the functionality test in individual cases.
The Madras High Court observed that the statutory prohibition under Section 17(5) remained applicable and that the petitioner was not entitled to the disputed ITC.
Finding no infirmity in the adjudication order, the High Court declined to interfere with the proceedings and upheld the invocation of Section 74 as well as the demand confirmed by the GST authorities.
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