The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru Bench, has set aside a GST demand of ₹4.60 lakh after holding that a difference between Input Tax Credit claimed in GSTR-3B and the credit reflected in GSTR-2A could not be treated as inadmissible without examining the taxpayer’s invoice-wise reconciliation.
The Bench of Prabhakaran P.M. (Judicial Member) and Ravi Jesuraj S. (Technical Member) also found that the original adjudication order was vitiated by the failure to grant the taxpayer a personal hearing. The Tribunal consequently remanded the matter to the Proper Officer for fresh adjudication.
The appellant/assessee is a proprietary concern engaged in quarrying and the sale of crushed stones. It challenged an order passed by the Joint Commissioner of Commercial Taxes (Appeals)-6, Bengaluru, which had upheld the tax demand raised by the Commercial Tax Officer, LGSTO-170, Tumakuru.
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The dispute related to the financial year 2018-19. During verification of the returns, the department detected a difference between the ITC availed by the taxpayer in GSTR-3B and the credit appearing in its GSTR-2A.
On this basis, the department alleged that the taxpayer had availed excess ITC of ₹2,33,502, comprising ₹1,16,751 each under the Central GST and State GST heads.
A pre-show cause intimation in Form GST DRC-01A was issued on January 22, 2024. This was followed by a show cause notice in Form GST DRC-01 dated January 30, 2024, proposing recovery of the disputed credit along with interest of ₹2,03,730 and a penalty of ₹23,350. The total proposed liability was ₹4,60,582.
As no reply was filed within the prescribed period, the Proper Officer passed an order on April 20, 2024, confirming the entire demand under Section 73(9) of the CGST and KGST Acts.
The taxpayer’s first appeal was dismissed on November 7, 2024. The First Appellate Authority held that mere possession of purchase invoices was insufficient to establish entitlement to ITC and that the taxpayer was required to demonstrate compliance with Section 16(2)(c), including payment of tax by the suppliers.
Before the GSTAT, the taxpayer argued that the alleged difference did not represent an excess claim of ITC. It contended that the disputed credit related to invoices issued during the financial year 2017-18 but was availed in returns filed during the financial year 2018-19 within the time permitted under Section 16(4).
According to the taxpayer, the credit appeared in its GSTR-2A for 2017-18 and not in the GSTR-2A for 2018-19. Therefore, comparing the GSTR-3B of 2018-19 only with the GSTR-2A of the same financial year, without taking the earlier year’s invoices into account, created an artificial mismatch.
The taxpayer submitted a reconciliation statement, its ITC register, annual returns in GSTR-9 and reconciliation statements in GSTR-9C in support of its claim.
It was further argued that the authorities had not considered this reconciliation and had confirmed the demand merely on the basis of the year-wise difference between GSTR-3B and GSTR-2A.
The Tribunal observed that Section 16(4), as applicable during the transitional period, permitted taxpayers to claim ITC relating to financial year 2017-18 invoices up to the due date of the return for March 2019. This period was extended through Removal of Difficulties Order No. 02/2018-Central Tax dated December 31, 2018.
It further noted that GSTR-2A was, during the relevant period, a facilitation tool and did not by itself operate as a statutory restriction on the availability of ITC.
The Bench referred to CBIC Circular No. 183/15/2022-GST dated December 27, 2022, which provides a mechanism for verification of ITC differences arising between GSTR-3B and GSTR-2A for financial years 2017-18 and 2018-19.
According to the Tribunal, the circular requires the Proper Officer to verify such claims instead of summarily disallowing them merely because the invoices are not reflected in the GSTR-2A for a particular financial year.
“The Appellate Authority’s finding that non-appearance of an invoice in GSTR-2A of Financial Year 2018-19 shows that the supplier did not pay tax is an assumption, not a finding reached after verification,” the Tribunal observed.
It found that no invoice-wise verification had actually been conducted by either the adjudicating authority or the First Appellate Authority.
The Tribunal accordingly ruled that the demand could not be sustained on the existing record without verification of the taxpayer’s claim that ITC pertaining to 2017-18 had been availed during 2018-19 within the statutory time limit.
The First Appellate Authority had relied upon the decisions in Mahalakshmi Cotton Ginning Processing and Oil Industries v. State of Maharashtra, ALD Automotive Private Limited v. CTO and Microqual Techno Ltd. v. State of Karnataka to uphold the disallowance.
The GSTAT, however, held that these decisions were distinguishable.
It observed that the Mahalakshmi Cotton decision arose under the Maharashtra Value Added Tax Act and involved a statutory scheme different from the GST framework.
The decision in ALD Automotive, the Tribunal noted, concerned a claim of input tax credit made beyond the statutory time limit under a different State enactment. It did not deal with denial of ITC solely because purchases were not reflected in the auto-populated GSTR-2A statement.
Similarly, the ruling in Microqual Techno was based on a finding that the ITC claim did not arise from genuine transactions and involved an intention to evade tax. In the present case, there was no allegation or finding that the underlying purchases were not genuine. The disallowance was based only on the mismatch between GSTR-3B and GSTR-2A.
The Tribunal held that these precedents could not be mechanically applied to the taxpayer’s claim.
The Tribunal also found a serious violation of the principles of natural justice.
The show cause notice issued to the taxpayer recorded the date, time and venue of the personal hearing as “NA”. There was also no material on record to show that any hearing was subsequently offered before the demand was confirmed.
Referring to Section 75(4) of the CGST Act, the Bench held that an opportunity for personal hearing must be granted whenever an adverse decision is contemplated against a taxpayer, irrespective of whether the taxpayer has specifically requested such a hearing.
The Tribunal accepted the taxpayer’s reliance on Sahara India (Firm) v. CIT and several High Court decisions holding that the requirement of personal hearing is mandatory where an adverse order is proposed.
It concluded that the failure to provide a personal hearing was, by itself, sufficient to set aside the original adjudication order.
The Tribunal, however, rejected the taxpayer’s separate contention that the proceedings were invalid because the department had not issued a scrutiny notice in Form GST ASMT-10.
It explained that Section 61, which deals with scrutiny of returns, and Section 73, which authorises determination of tax not paid, short-paid or wrongly refunded and ITC wrongly availed or utilised, operate independently.
The proceedings in the present case had been initiated under Section 73 read with Rule 142 following an audit reference and were not proceedings commenced under Section 61. Therefore, the absence of an ASMT-10 notice did not, by itself, render the Section 73 proceedings invalid.
The Bench clarified that this finding did not cure the more fundamental defects concerning the failure to verify the ITC reconciliation and the denial of a personal hearing.
The Tribunal set aside both the original order dated April 20, 2024, and the appellate order dated November 7, 2024.
The Proper Officer was directed to undertake an invoice-wise verification of the reconciliation furnished by the taxpayer. The verification must cover the taxpayer’s GSTR-2A for 2017-18, the suppliers’ GSTR-1 returns, the ITC register, books of account and GSTR-9 and GSTR-9C returns for financial years 2017-18 and 2018-19.
The officer must also examine whether the credit relating to financial year 2017-18 was availed within the extended time permitted under Section 16(4) and apply CBIC Circular No. 183/15/2022-GST wherever relevant.
The Tribunal directed the department to communicate the date, time and venue of the personal hearing properly and allow the taxpayer to produce its invoices, books of account and additional reconciliation statements.
A fresh, reasoned and speaking order satisfying the requirements of Section 75(6) must be passed within 12 weeks from the date on which the GSTAT order is communicated.
The Bench clarified that it had not expressed any final opinion on the admissibility of the disputed ITC. All factual questions were left open for examination by the Proper Officer.
It further directed that any liability towards interest under Section 50 and penalty under Section 73 must follow the fresh determination of the principal tax liability and could not be independently sustained on the strength of the orders that had been set aside.
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