The Goods and Services Tax Appellate Tribunal (GSTAT), Ernakulam Bench, has held that a tax demand under Section 73 cannot be sustained where the shortfall arising from disallowed input tax credit (ITC) is fully covered by an undisputed excess payment of output tax.

The Bench of Subramanya V. Rayaprol (Vice President) and Ramamoorthi Sriram (Technical Member) has ruled that requiring a taxpayer to first pay the disputed shortfall and then separately seek a refund of excess tax would serve no useful purpose. It also rejected demands relating to sales returns and delayed payment of tax after finding that the adjudication travelled beyond the show cause notice and that the interest demand lacked essential particulars.

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The proceedings arose from scrutiny of returns filed by appellant/assessee for 2017–18. Following a comparison of GSTR-3B and GSTR-2A, the department issued a show cause notice under Section 73 of the CGST and Kerala GST Acts and subsequently confirmed demands of tax, interest and penalty.

The dispute involved ITC allegedly not reflected in GSTR-2A, tax attributable to sales returns supported by debit and credit notes, and interest for delayed payment of tax.

The Joint Commissioner (Appeals) upheld the assessment. The taxpayer then approached the Tribunal, arguing that its excess output tax payment exceeded the disputed ITC and that the documents supporting the sales returns had been wrongly rejected.

The Tribunal examined whether proceedings under Section 73 could be maintained when excess output tax already paid covered the shortfall attributable to ineligible ITC. It also considered whether the excess output tax payment involved in the case was subject to the test of unjust enrichment.

The remaining issues concerned the rejection of debit and credit notes, confirmation of a demand on grounds absent from the show cause notice, and the validity of an interest demand that did not identify the relevant periods or explain its calculation.

The taxpayer submitted that it had paid ₹99,449.20 in excess output tax, over and above the liability reflected in GSTR-1. It argued that this amount exceeded the disputed ITC and, therefore, there was no overall short payment of tax.

It also explained that, owing to ignorance during the initial GST period, amounts relating to debit and credit notes had been reported as ITC instead of being used to reduce output tax liability.

The department opposed the adjustment, contending that payment of output tax and availment of ITC were distinct statutory mechanisms. According to the Revenue, excess output tax could be recovered only through a formal refund application under Section 54, after examining whether the tax burden had been passed on to customers.

The Tribunal noted that the excess output tax payment was undisputed. It found no statutory impediment to adjusting that excess against the shortfall attributable to disallowed ITC in the circumstances before it.

Requiring the taxpayer to pay the demand and subsequently seek a refund of money already paid in excess would, the Bench held, be an exercise in futility.

Accordingly, it concluded that where the excess output tax payment exceeded the ITC denied, there was no overall short payment warranting proceedings under Section 73. The associated demand of tax, interest and penalty was therefore unsustainable.

The Tribunal drew support from the Kerala High Court’s decision in Rejimon Padickaparamabil Alex v. Union of India. Although that judgment concerned cross-utilisation of ITC, the Bench considered its reasoning relevant to a situation where the adjustment resulted in no revenue shortfall.

The Revenue argued that permitting an adjustment would bypass the statutory scrutiny applicable to refunds, particularly the examination of whether the taxpayer had passed the tax burden on to another person.

The Tribunal referred to Section 54(8)(c), which addresses specified refunds concerning supplies not provided, wholly or partly, subject to the conditions stated in that provision.

On the facts before it, the Bench treated the excess output tax payment as falling within that exception and rejected the department’s unjust enrichment objection. It consequently answered both principal questions of law in favour of the taxpayer.

The Tribunal also criticised the manner in which the first appellate authority had dealt with the case.

It observed that the taxpayer’s submissions occupied approximately five pages of the appellate order but had been rejected through a single-line conclusion stating that there was no evidence supporting the disputed ITC claim.

The Bench held that the appellate order was non-speaking, arbitrary and demonstrated a lack of application of mind. It found that the failure to address the taxpayer’s specific contentions violated the principles of natural justice and independently justified setting aside the order.

Nevertheless, considering that the dispute related to 2017–18, the Tribunal proceeded to decide the substantive issues.

The show cause notice alleged that sales returns of ₹3,55,206 were unsupported by documents. The taxpayer maintained that it had produced the relevant debit and credit notes.

The adjudicating authority, however, rejected the claim because the counterparty had not disclosed a debit note in its GSTR-1 or annual return.

The Tribunal held that this introduced a ground absent from the show cause notice. A demand initiated on the allegation of missing supporting documents could not be confirmed on the grounds that the counterparty had failed to report the document in its returns.

In the context of the disputed 2017–18 period, the Bench further held that otherwise valid debit and credit notes could not be invalidated merely because they had not been uploaded to the portal. It set aside the related demand of tax, interest and penalty.

The Tribunal separately rejected the demand for interest relating to delayed payment of tax.

It found that the show cause notice did not identify the months of default, the amount of tax on which interest was calculated, or the period for which interest was demanded.

There was also an unexplained difference between the ₹1,13,017 interest proposed in the notice and the ₹1,54,314 confirmed in the adjudication order.

The Bench held that the absence of these particulars made the notice vague and violated natural justice. The interest demand was consequently unsustainable.

The Tribunal allowed the appeal, set aside the order of the Joint Commissioner (Appeals), and granted consequential relief.

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