The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru Bench, has held that tax cannot be demanded on alleged unaccounted inward supplies when reconciliation statements and accounting records establish that the goods covered by the disputed e-way bills were duly recorded in the taxpayer’s books.
The bench of Prabhakaran P M (Judicial Member) and Ravi Jesuraj S (Technical Member) set aside a demand of approximately ₹28.45 lakh relating to 46 e-way bills. It also granted substantial relief on input tax credit (ITC) reconciliation, interest on credit reversed against purchase returns, and credit notes omitted from GSTR-1.
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The appellant/assessee is engaged in manufacturing and supplying cutting tools, inserts, tungsten carbide tips, mining and construction machinery, and related services.
The dispute concerned the financial year 2019–20. Following an audit conducted in November and December 2023, the department raised objections concerning differences between ITC claimed in GSTR-3B and credit appearing in GSTR-2A, allegedly unaccounted inward supplies, failure to reverse ITC on purchase returns, and credit notes not reported in GSTR-1.
The adjudicating authority passed an order on June 29, 2024, recording a tax demand of ₹33,41,760, interest of ₹25,77,883, and penalty of ₹3,14,637. The first appellate authority upheld the adjudication order on November 26, 2025.
Before the Tribunal, the company maintained that its reconciliation statements, purchase ledger extracts and other supporting documents had not been properly considered.
The largest component of the dispute arose from the department’s allegation that purchases corresponding to 46 e-way bills had not been recorded in the company’s purchase register.
Invoking Section 35(6) of the CGST Act, the authorities treated the alleged unaccounted inward supplies as deemed outward supplies. They added a gross profit margin of 10% to determine the corresponding value and raised a tax demand of approximately ₹28.45 lakh.
The company explained that the e-way bills related to the transportation of imported goods from customs warehouses to its premises. It produced statements linking the e-way bills to supplier invoices, accounting document numbers, purchase register entries and ledger screenshots.
The Tribunal found that the adjudicating authority and the first appellate authority had failed to examine this material. It observed that the explanation was specific and capable of verification. If the officers considered the accounting references inadequate, they could have sought further documents and recorded findings on each disputed entry.
After independently examining the records, the Tribunal found that the goods transported under every disputed e-way bill were recorded in the company’s books.
Section 35(6), it explained, applies where goods or services have not been accounted for. Since the factual foundation for invoking the provision was absent, the demand could not survive.
The Tribunal consequently set aside the demand, together with the associated interest and penalty.
The first appellate authority had relied on a decision under the Delhi Value Added Tax Act to support the estimation of deemed sales by adding a 10% gross profit margin.
The Tribunal distinguished that decision, observing that Section 35(6) of the CGST Act could not be equated with the deemed sale provisions considered under the VAT law.
Having found that the goods were accounted for, the Bench held that the question of adding a 10% gross profit margin did not arise.
The Tribunal criticised the failure of the authorities to consider the company’s reconciliation statements and supporting records.
It referred to Section 73(9), which requires determination of tax after considering the taxpayer’s representation, and Section 75(6), which requires an order to state the relevant facts and the basis of the decision.
The Bench stressed that when a registered person explains a discrepancy, the proper officer must examine that explanation and determine whether it is satisfactory. Rejecting an appeal without addressing the evidence does not meet the standard required of a reasoned quasi-judicial order.
The company also challenged disallowance of ITC of approximately ₹3.96 lakh arising from differences between GSTR-2A and GSTR-3B.
On examining the invoices and reconciliation documents, the Tribunal found that a substantial portion of the disputed credit was supported by records.
For invoices issued by Golden Palms Hotel & Spa, the dispute arose because a tax summary reference had been recorded in the books instead of the underlying individual invoice references. The Tribunal verified the underlying invoices against the GSTR-2A entries and allowed the disputed credit of ₹1,24,693 each under CGST and SGST.
It noted that the authorities had questioned the credit on the ground of non-reflection in GSTR-2A, without raising any separate objection concerning substantive eligibility.
The Bench also accepted documentary support for other disputed entries, including credit relating to imported goods. For the relevant period, it observed, the absence of a utility to auto-populate import IGST in GSTR-2A did not prevent an importer from claiming eligible credit on the basis of bills of entry, subject to fulfilment of the other statutory conditions.
The Tribunal set aside ITC disallowance to the extent of ₹3,44,974, comprising IGST of ₹95,588 and CGST and SGST of ₹1,24,693 each.
The company did not succeed on the remaining four invoices.
The Tribunal observed that GSTR-2A served as a facilitator and rejected the department’s contention that the taxpayer was required to match auto-populated GSTR-2A data before claiming ITC for the period preceding the introduction of Section 16(2)(aa).
However, it held that the independent requirements of Section 16(2)(c) continued to apply. The claimant also bore the burden of establishing eligibility under Section 155.
For the four remaining invoices, the company had not furnished certificates or other evidence establishing payment of tax by the suppliers to the government.
The Tribunal therefore upheld disallowance of ₹51,255, comprising IGST of ₹2,721 and CGST and SGST of ₹24,267 each. It directed that interest be computed under Section 50(3), read with Rule 88B, and upheld the consequential penalty under Section 73(9).
A separate issue concerned ITC of approximately ₹1.04 lakh that the company had failed to reverse following a vendor credit note relating to purchase returns.
The company discharged the amount through Form GST DRC-03 on March 14, 2024, before issuance of the show-cause notice. It disputed the interest demand on the ground that sufficient credit had remained available in its electronic credit ledger.
The Tribunal examined Section 50(3) and Rule 88B(3). It explained that interest applies to credit wrongly availed and utilised. Under the prescribed mechanism, wrongly availed credit is treated as utilised when the electronic credit ledger balance falls below the amount of such credit.
On examining the ledger, the Tribunal found that the balances had remained above the disputed amounts under the respective tax heads. It therefore held that no interest was payable and set aside the SGST interest demand of ₹27,530.
The Tribunal further held that the company had paid the tax before issuance of the notice and that no interest was payable on it.
In these circumstances, Sections 73(5) and 73(6) barred issuance of a notice concerning the tax already paid or penalty on that amount. The Tribunal accordingly set aside the penalty of ₹5,188.
The amount already paid through DRC-03 remained appropriated.
The final issue concerned credit notes relating to sales returns of ₹11,77,942 that were recorded in the company’s sales register but not reported in GSTR-1. The authorities had raised a demand described in the order as ₹99,718.
The Tribunal acknowledged that reporting credit notes in GSTR-1 was mandatory under the applicable provisions. It nevertheless distinguished the reporting lapse from the existence of a tax shortfall.
Examining Section 34, the Bench explained that credit notes, when the prescribed conditions are satisfied, permit a reduction in output tax liability. Their issuance does not itself increase the supplier’s liability.
The Tribunal held that omission to report the credit notes in GSTR-1, although a compliance lapse, did not by itself create a liability to tax. It set aside the demand of ₹99,718 and the associated interest and penalty.
The Tribunal modified the first appellate order, granting relief on the alleged unaccounted inward supplies, most of the disputed ITC, interest and penalty relating to purchase-return credit, and the demand based on unreported credit notes.
It sustained ITC disallowance of ₹51,255, with interest to be determined under Section 50(3) read with Rule 88B, and penalty under Section 73(9). No order was made as to costs.
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