The Madras High Court has set aside a GST assessment order after finding that the tax authorities had already issued a reasoned dropping order on the very same issue, holding that the assessee’s reported transactions were non-GST/non-supply transactions and did not warrant reversal of Input Tax Credit (ITC).
The bench of Justice Senthilkumar Ramamoorthy remanded the matter for fresh consideration after observing that the earlier findings required due consideration before passing any adverse order.
The dispute arose from proceedings initiated under Section 73(1) of the CGST/TNGST Act for the financial year 2021-22. The department had proposed reversal of ITC on the premise that the value disclosed in Table 5 of GSTR-9 represented exempt supplies, thereby attracting the provisions of Section 17(2) of the CGST Act and Rule 42 of the CGST Rules, which require reversal of common credit attributable to exempt supplies.
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However, during adjudication, the petitioner furnished a detailed reply along with supporting documents explaining that the figures reflected in Table 5 related to non-GST and non-supply transactions, rather than exempt supplies under GST law.
The petitioner relied heavily on a dropping order dated December 24, 2025, which had examined the reply and documentary evidence in detail.
The adjudicating authority in that order concluded that the value reported in Table 5 of GSTR-9 pertained to non-GST/non-supply transactions; such transactions did not qualify as exempt supplies; consequently, Section 17(2) and Rule 42, governing reversal of common ITC, had no application; since there was no exempt turnover, the proposed ITC reversal was legally unsustainable. Accordingly, the proposed demand of ₹5,18,213, together with interest and penalty, was dropped and the proceedings were closed, subject to verification of documents.
Despite the existence of the dropping order, the department subsequently issued the impugned assessment order on November 28, 2025.
Appearing for the petitioner, counsel argued that the impugned order had been passed without considering the findings recorded in the earlier reasoned dropping order, even though the issues involved were identical.
On behalf of the State, the Government Counsel fairly submitted before the Court that the matter could be remanded for fresh consideration.
The High Court observed that the dropping order was a reasoned order passed after examining both the taxpayer’s reply and the supporting documents.
The Court noted that the earlier adjudicating authority had expressly concluded that the transactions reflected in Table 5 of GSTR-9 were non-GST/non-supply transactions, that there was no exempt turnover, and therefore the proposed reversal of ITC under Section 17(2) and Rule 42 was not legally sustainable.
In light of these findings, the Court held that the matter deserved reconsideration before any contrary assessment could be sustained.
Allowing the writ petition, the Madras High Court set aside the impugned assessment order dated 28 November 2025; remanded the matter to the State Tax Officer for fresh consideration; directed the authority to provide the petitioner a reasonable opportunity of hearing; and ordered that a fresh speaking order be passed within three months from the date of receipt of the High Court’s order.
The Court also disposed of the connected miscellaneous petition without any order as to costs.
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