The Goods and Services Tax Appellate Tribunal (GSTAT) Bengaluru Bench, has set aside a ₹9.56 lakh demand after finding that a taxpayer had mistakenly reported tax on credit notes as input tax credit in GSTR-3B instead of reducing its output tax liability.
The Division Bench comprising Prabhakaran P.M. (Judicial Member) and Ravi Jesuraj S. (Technical Member) has observed that the reporting error did not result in any loss of tax to the Government and that the demand, based solely on a difference between GSTR-3B and GSTR-2A, could not survive scrutiny of the taxpayer’s own returns.
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The central legal question was whether tax became payable merely because an adjustment relating to credit notes had been entered in the wrong table of the return, when the records showed that the taxpayer had paid output tax on the full value of its original sales and had not claimed a double benefit.
Agrico Organics, a public limited company with its head office in New Delhi, operates a depot at Sindhanur in Karnataka that sells pesticides falling under HSN 3808. The dispute concerned the period from July 2017 to March 2018.
According to the company, customers returned certain goods during the financial year, following which it issued 110 credit notes involving tax of approximately ₹6.78 lakh. Instead of deducting this tax from its output tax liability, the company added it to the input tax credit reported in its monthly GSTR-3B returns.
The company subsequently filed its annual return in Form GSTR-9 on November 8, 2019. The credit notes were disclosed in Table 4I, while the corresponding difference appeared in Table 6J.
The tax officer initiated scrutiny in August 2022. Proceedings under Section 73 followed on the ground that the company had claimed ITC of ₹1,16,16,320 in GSTR-3B against ₹1,11,68,524 reflected in GSTR-2A, resulting in an alleged excess claim of ₹4,47,796.
In replies sent by email in June and September 2023, the company explained that the difference arose from its treatment of credit notes. It furnished sample credit notes and its annual return and requested a virtual hearing.
Nevertheless, the adjudicating authority confirmed the demand in December 2023. The first appellate authority dismissed the company’s appeal on October 6, 2025.
The confirmed demand comprised tax of ₹4,47,796, interest of ₹4,63,468 and penalty of ₹44,780, aggregating to ₹9,56,044.
Following dismissal of the first appeal, the proper officer issued a recovery notice under Section 79(1)(c) on November 20, 2025, and the company’s ICICI Bank account was frozen.
The company approached the Tribunal on May 2, 2026, after making the prescribed pre-deposit. On May 14, 2026, it paid the remaining demand under protest through Form GST DRC-03 to secure release of its bank account. Taking the earlier pre-deposits into account, the entire demand stood paid.
The Tribunal held that the appeal was within time under the notified filing window applicable to the impugned order.
On examining GSTR-9, the Tribunal found that credit relating to purchases from registered suppliers was approximately ₹1.09 crore. This was below the GSTR-2A credit figure, whether the figure appearing in the annual return or the figure used in the notice was considered.
The Tribunal therefore found no excess purchase-related credit over the supplies reported by suppliers.
It further found that the difference between total credit taken in GSTR-3B and credit on inward supplies substantially matched the tax on credit notes disclosed in Table 4I. The CGST and SGST component of those credit notes exceeded the disputed tax demand of ₹4,47,796.
Table 9 also showed that the company had paid output tax on the full value of its sales without reducing that liability by the credit notes. Consequently, the credit-note adjustment had been taken only once, albeit under the wrong heading.
The Tribunal concluded that the disputed amount represented tax on the company’s own credit notes rather than ITC on purchases that suppliers had failed to report.
The Tribunal criticised the authorities for treating the difference between two aggregate figures as conclusive proof of wrongly availed credit.
It explained that GSTR-2A reflects inward supplies reported by suppliers. A credit note issued by the taxpayer to its own customer does not originate from a supplier and would therefore not appear in the taxpayer’s GSTR-2A. Once tax on such credit notes was incorrectly entered as ITC in GSTR-3B, a mismatch was inevitable.
For the period concerned, the Tribunal held that the comparison alone did not establish an unlawful credit claim. It noted that Section 16(2)(aa) came into force only on January 1, 2022, and referred to Circular No. 183/15/2022-GST as recognising the need for factual verification of mismatches for 2017-18 and 2018-19.
The circular’s documentary requirements concerning supplier-side reporting lapses were misplaced in this case because the disputed difference concerned credit notes issued by the company itself.
The Tribunal also identified a flaw in the demand calculation. The officer had compared combined IGST, CGST and SGST totals and then divided the resulting difference equally between CGST and SGST without tracing it to the relevant tax heads. Each tax head, the Bench observed, has its own ledger and liability.
The Tribunal accepted the Revenue’s argument that tax on a supplier’s own credit notes is not “input tax” under Section 2(62), and Section 16 does not permit such tax to be claimed as ITC.
However, it distinguished that reporting error from the question of whether any additional tax was actually due.
Under Section 34, a supplier may issue credit notes for returned goods and adjust its output tax liability, subject to the applicable statutory requirements. On the record before it, the Tribunal found that the company had declared the credit notes in its returns and had not separately reduced its output tax liability.
Had the company entered the adjustment in the correct table, the tax paid to the Government would have been the same. Its mistake therefore concerned the form of reporting rather than an additional substantive tax liability.
Relying on the distinction between substantive and procedural conditions recognised in Mangalore Chemicals & Fertilizers Ltd. v. Deputy Commissioner of Commercial Taxes, the Tribunal held that the wrong choice of table did not justify the demand in the circumstances of this case.
Before the Tribunal, the Revenue argued that the company had not established that the goods were actually returned, that the incidence of tax had not been passed on, or that customers had reversed their corresponding ITC.
The Bench held that these objections were absent from the show cause notice.
Section 75(7) prohibits confirmation of a demand on grounds other than those specified in the notice. A general statement that documents were unsatisfactory, without identifying the deficiency, did not put the genuineness of the credit notes or compliance with those conditions in issue.
The Tribunal observed that sustaining the demand on the Revenue’s new arguments would require findings on allegations the company had never been called upon to answer.
It also held that the recipient’s reversal of ITC was not an express condition under Section 34(2) as applicable to 2017-18. The order noted that the express condition introduced with effect from October 1, 2025, could not be read into the law governing the disputed period.
The Tribunal found that the adjudicating officer had failed to meaningfully examine the company’s explanation and the annual return already available on the portal.
It also criticised the first appellate authority for attributing the mismatch to suppliers not filing returns, not migrating to GST or having invalid GSTINs, even though those allegations were neither made in the notice nor supported by the record. The appellate order failed to address the company’s principal explanation concerning credit notes.
At the same time, the Bench recorded shortcomings in the company’s conduct. It had sought additional time at the scrutiny stage but failed to submit a further reply, sent later explanations by email rather than filing Form GST DRC-06 on the portal, and produced only samples of the credit notes.
The company also missed three hearings before the first appellate authority without seeking adjournments. Its virtual-hearing request relied on an instruction addressed to Central tax officers, although the appellate authority was a State tax officer, and the company did not pursue that request.
These lapses did not save the demand. Since the first appellate authority had decided the matter on merits, the Tribunal examined whether that decision was sustainable on merits. It did not separately decide the company’s personal-hearing objection under Section 75(4).
The Tribunal held that interest could not survive because the company had not withheld tax that was due and the disputed amount was not, in substance, wrongly availed by ITC.
The penalty under Section 73(9) also fell once no tax was found payable.
The Bench set aside both the adjudication order and the first appellate order, together with the entire tax, interest and penalty demand. It directed a refund, in accordance with law, of the amount paid under protest through DRC-03 dated May 14, 2026.
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