The Karnataka High Court has granted interim protection to a taxpayer challenging GST proceedings initiated under Section 74 of the Central Goods and Services Tax Act, 2017, after observing that the petition raises a substantial question regarding the jurisdiction of the adjudicating authority to invoke the provision for levying interest and penalty despite the prior reversal of Input Tax Credit (ITC).
The bench of Justice B.M. Shyam Prasad passed the interim order while hearing a writ petition, which had approached the High Court after its statutory appeal against the adjudication order was dismissed on the ground of limitation.
The petitioner challenged not only the adjudication order but also the jurisdiction of the tax authorities to initiate proceedings under Section 74, contending that the proceedings were contrary to the statutory framework and violated the principles of natural justice.
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The dispute originated from a search conducted at the petitioner’s premises on 10 November 2020. Following the search, the taxpayer reversed Input Tax Credit amounting to ₹3.58 crore on 2 December 2020. Subsequently, on 18 March 2021, the department issued an intimation in Form GST DRC-01A, referring to the search proceedings and the ITC reversal.
According to the petitioner, it had already responded to the department by informing that the ITC had been reversed along with the applicable interest and a penalty calculated at 15%. Despite this, the department issued a show cause notice proposing recovery of interest and penalty for the amount including the already reversed ITC, culminating in the impugned adjudication order.
Appearing for the petitioner, Senior Advocate V. Raghuraman argued that the proceedings had effectively been initiated only for imposing interest and penalty even though the ITC had already been voluntarily reversed. He contended that such action was inconsistent with the statutory scheme contained in Section 74 of the CGST Act.
The petitioner specifically relied upon Sections 74(6) and 74(7) of the Act, arguing that if the adjudicating authority had any jurisdiction at all in the facts of the case, it could have exercised powers only under Section 74(7) and not under Section 74(6). According to the petitioner, the adoption of the incorrect statutory provision rendered the entire proceedings without jurisdiction and therefore liable to be set aside.
After considering the submissions and examining the record, the court found that the matter warranted interim protection.
The Court granted the interim relief sought by the petitioner, directing that the interim order would remain in force until further orders. At the same time, the Court preserved the respondents’ liberty to complete their pleadings and seek vacation of the interim order or request an early disposal of the writ petition.
The High Court called upon the standing counsel for the respondents to accept notice and directed the petitioner’s counsel to serve copies of the petition papers upon the respondents’ counsel at the earliest. The matter has been directed to be re-listed on 29 July 2026 for further consideration.
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