The Goods and Services Tax Appellate Tribunal (GSTAT), Kolkata Bench, has held that an assessee cannot be saddled again with a demand for excess Input Tax Credit (ITC) where the record establishes that the disputed ITC had already been reversed before the demand order was issued. 

The bench of S.G. Chattopadhyay (Judicial Member) and Bijoy Kumar (Technical Member) has observed that the question of applicable interest and penalty had not been properly examined and remanded that limited issue to the first appellate authority for fresh computation.

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The case concerned a taxpayer engaged in works contract services. The department had issued a show cause-cum-demand notice dated December 29, 2023 under Section 73(1) of the CGST Act, 2017, alleging that excess ITC had been availed during financial years 2018-19, 2019-20 and 2020-21.

According to the department’s computation, the alleged excess ITC amounted to Rs.53,95,795, comprising IGST of Rs.6,113, CGST of Rs.26,94,841 and SGST of Rs.26,94,841. The computation was principally based on a comparison between ITC claimed in GSTR-3B and the ITC reflected in the auto-populated GSTR-2A/2B data.

The show cause notice proposed disallowance and recovery of the alleged ineligible ITC, together with applicable interest under Section 50 and penalty under Section 73. The taxpayer was also informed of the statutory option under Section 73(8) to pay the tax and interest within the prescribed period and conclude the proceedings without penalty.

The taxpayer disputed the demand and furnished year-wise reconciliation statements along with supporting documents, including GSTR-9, GSTR-9C, GSTR-2A and Form GST DRC-03.

The taxpayer contended that the alleged excess ITC had already been voluntarily reversed and that the Revenue had failed to appropriately account for those reversals. The record showed, among other things, a DRC-03 dated June 22, 2020 through which substantial amounts had been reversed under CGST and SGST.

The taxpayer also appeared for personal hearing and maintained that the demand should be set aside in view of the reconciliation and evidence already placed on record.

The original adjudicating authority nevertheless disallowed ITC of Rs.53,95,795 and ordered recovery under Section 73(9) of the CGST Act. It also ordered recovery of applicable interest under Section 50(3) and imposed a penalty of Rs.4,29,164.

At the same time, the adjudicating authority appropriated Rs.13,03,063 towards ITC that had already been paid, besides appropriating interest of Rs.27,405.

The taxpayer challenged the order before the first appellate authority, arguing, inter alia, that the Revenue had mechanically proceeded on the basis of the GSTR-2A/GSTR-3B mismatch without adequately examining the underlying documents and that the earlier DRC-03 reversal had not been properly considered.

The first appellate authority examined the taxpayer’s reconciliation, invoices, returns and payment records and concluded that most of the alleged excess ITC had already been reversed.

For FY 2018-19, the appellate authority found that the taxpayer had reversed Rs.13,89,473 each under CGST and SGST through the electronic cash ledger. For FY 2019-20, the taxpayer had reversed Rs.5,98,500 each under CGST and SGST through the credit ledger.

After examining the year-wise figures and supporting material, the appellate authority concluded that the residual excess ITC worked out to only Rs.2,08,058.90, comprising Rs.5,573 IGST, Rs.1,01,243.95 CGST and Rs.1,01,242.95 SGST. It consequently modified the original demand and directed payment of Rs.2,08,058.90 along with applicable interest and penalty.

The department carried the matter to GSTAT, contending principally that the taxpayer had not established that the DRC-03 payments and ledger debits were specifically made towards the ITC liability involved in the present proceedings.

The Revenue also questioned the absence of a specific reason recorded in column 8 of Form GST DRC-03 and argued that the appellate authority had failed to properly consider the taxpayer’s liability towards interest and penalty.

The taxpayer, on the other hand, maintained that the first appellate authority had correctly examined the DRC-03 forms, invoices, reconciliation statements and returns and had rightly concluded that the excess ITC had already been reversed. It was also pointed out that the Revenue had acknowledged receipt of the amount through Form GST DRC-04.

The Kolkata Bench rejected the Revenue’s principal objection concerning the absence of a specific explanation in column 8 of DRC-03.

The Tribunal noted that column 8 of DRC-03 asks for “reasons, if any” and is not a mandatory field requiring the taxpayer to provide an explanation in every case. Therefore, the adjudicating authority’s reliance on the absence of a reason in that column could not be sustained.

The Bench also independently examined the records available on the GST portal. It found that the DRC-03 dated June 22, 2020 demonstrated debit of Rs.5,98,500 under CGST and an equivalent amount under SGST from the taxpayer’s credit ledger. It further found that Rs.13,89,473 each under CGST and SGST had been reversed through the electronic cash ledger.

The Tribunal noted that these amounts had actually reached the Revenue’s coffers.

The Tribunal further held that the Revenue’s objection regarding the absence of an ARN number in DRC-03 did not undermine the taxpayer’s case.

The Bench noted that the first appellate authority had scrutinised the reconciliation statement and found it correct. More significantly, the Revenue itself had acknowledged receipt of the reversal through DRC-04. Therefore, the Revenue could not successfully contend that the taxpayer had failed to establish payment merely because the DRC-03 did not contain a particular explanatory entry.

The Tribunal found another important flaw in the original adjudication concerning the treatment of carried-forward ITC.

The adjudicating authority had questioned whether the taxpayer could establish that certain ITC had been carried forward within the time prescribed under Section 16(4). GSTAT held that this reasoning could not be accepted in view of Section 16(5) of the CGST Act.

Section 16(5), as reproduced in the order, provides a special provision for invoices or debit notes relating to financial years 2017-18, 2018-19, 2019-20 and 2020-21, permitting the registered person to take ITC in a return filed up to November 30, 2021, notwithstanding the limitation contained in Section 16(4).

This finding was significant because the original demand had covered the period from FY 2018-19 through FY 2020-21.

The Tribunal also took note of an important position emerging from the Revenue’s own appeal.

Although the original demand was Rs.53,95,795, the Revenue had acknowledged that Rs.13,03,063 had already been paid and appropriated along with interest and penalty. Consequently, even according to the Revenue, the outstanding demand had come down to Rs.38,84,673.

The Tribunal observed that the Revenue’s challenge was therefore substantially concerned with whether the earlier payments could be linked to the disputed ITC liability.

On the central issue of ITC reversal, the Tribunal found no reason to disagree with the first appellate authority.

It specifically held that the taxpayer had reversed the disputed ITC by debiting Rs.13,89,473 each under CGST and SGST from the electronic cash ledger and Rs.5,98,500 each under CGST and SGST from the electronic credit ledger. According to the Tribunal, these reversals covered the disputed amount.

The Revenue’s argument that there was no proof connecting the payments with the ITC liability was rejected, particularly because the Revenue had acknowledged the payments through DRC-04.

Thus, the Tribunal effectively upheld the first appellate authority’s conclusion that the excess ITC itself could not again be demanded from the taxpayer.

While the Tribunal rejected the Revenue’s challenge concerning reversal of ITC, it found merit in the Revenue’s argument that the first appellate authority had not adequately dealt with interest and penalty.

The Tribunal examined Circular No.238/32/2024-GST dated October 15, 2024, concerning Section 128A of the CGST Act. Section 128A, inserted with effect from November 1, 2024, provides for waiver of interest or penalty, or both, in respect of specified demands under Section 73 pertaining to the period from July 1, 2017 to March 31, 2020, subject to the prescribed conditions.

Since the dispute arose under Section 73 and covered a period falling within the period contemplated by Section 128A, the Tribunal held that the taxpayer would be entitled to seek the statutory relief, subject to compliance with the prescribed procedure and conditions.

The Tribunal ultimately did not restore the original Rs.53.95 lakh demand. Instead, it remanded the matter to the first appellate authority under Section 113(1) of the CGST Act.

The appellate authority has been directed to freshly compute the interest and penalty, if any, attributable to the taxpayer. The taxpayer must be given an opportunity of hearing during this exercise. The Tribunal further directed that Circular No.192/04/2023-GST dated July 17, 2023 be kept in view while undertaking the computation.

If any interest or penalty liability remains after the fresh computation, the taxpayer has been given liberty to apply under Section 128A for waiver. The competent Revenue authority will then consider such an application in accordance with Section 128A and the CBIC’s instructions contained in the October 15, 2024 circular.

The entire exercise has been directed to be completed within three months from the date of communication of the GSTAT order. The Revenue’s appeal was accordingly decided and disposed of with these directions.

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