The Goods and Services Tax Appellate Tribunal (GSTAT), Chandigarh State Bench, has held that input tax credit cannot be reversed merely because a taxpayer trades in exempt cattle feed without examining whether credit was availed on inputs or services used for both taxable and exempt supplies.

The Bench of Jatinder Pal Singh (Judicial Member) and Pradeep Kumar Goel (Technical Member) clarified that where no ITC has been taken on purchases of wholly exempt traded goods, reversal would arise only to the extent of any common credit attributable to exempt supplies.

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The bench quashed the appellate order against a cooperative agricultural service society and remanded the matter for fresh adjudication. It also directed reconsideration of a separate demand arising from a difference between GSTR-1 and GSTR-9.

The case concerned the appellant/assessee which procures goods and services for its members and supplies them at a nominal markup.

The State GST authorities initiated proceedings for financial year 2019-20 through an intimation in Form GST DRC-01A dated May 2, 2024. The proposed demand arose from the society’s annual return, which disclosed exempt supplies without any corresponding ITC reversal.

According to the society, it submitted a reply in Part B of Form GST DRC-01A on May 22, 2024, explaining that the exempt turnover related to cattle feed purchased at a nil GST rate and that no ITC had been availed on those purchases.

A show cause notice followed on May 28, 2024. The adjudicating authority subsequently passed an order on August 30, 2024, raising a tax demand of ₹1,20,852, interest of ₹1,06,978 and a penalty of ₹20,000.

The tax demand comprised ₹1,19,506 towards ITC reversal and ₹1,346 towards an alleged short payment identified through reconciliation of GSTR-1 and GSTR-9.

The society filed a rectification application on November 22, 2024. The State Tax Officer rejected it on June 5, 2025, on the ground that no reply to Form GST DRC-01 had been filed.

The Deputy Commissioner of State Tax (Appeals), Patiala Division, upheld the lower authority’s order on December 10, 2025. The society then approached GSTAT.

Before the Tribunal, the society argued that the authorities had ignored its pre-notice reply and failed to examine the supporting documents and tax payment records. It also raised objections concerning the opportunity of hearing, the form and authentication of the notice, and the rejection of rectification.

These were grounds advanced by the society. The Tribunal ultimately disposed of the matter by directing fresh factual examination and adjudication.

The principal dispute concerned Section 17(2) of the CGST Act, read with Rules 42 and 43 of the CGST Rules.

The society contended that the department had mechanically applied an exempt-turnover ratio to its total ITC. It maintained that cattle feed classified under HSN 2309 had been purchased without GST and therefore generated no credit requiring reversal. Sample purchase invoices were produced in support.

The Tribunal explained that Section 17(2) restricts credit where goods or services on which ITC has been taken are used partly for taxable supplies and partly for exempt supplies.

It distinguished between credit on purchases of exempt cattle feed and any credit availed on common inputs or services supporting both taxable and exempt turnover.

The Bench observed that if no ITC was taken on purchases of wholly exempt traded goods, reversal would not be required unless the taxpayer had availed credit, such as on common input services, used partly for exempt supplies and partly for taxable supplies.

Reversal, the Tribunal held, would be required only to that extent, if any.

The Tribunal did not finally conclude that the society had no liability to reverse ITC.

Instead, it directed the original adjudicating authority to verify the documents relating to credit availed and ascertain whether any credit-bearing inputs or services were used for both taxable and exempt supplies.

The authority must then calculate the amount requiring reversal, if any, under Section 17(2).

The ruling thus distinguishes between exempt purchases on which no credit was taken and shared business inputs or services on which credit may require apportionment.

The second issue concerned a demand of ₹1,346, comprising ₹673 each under CGST and SGST. The department found that the tax liability declared in GSTR-1 exceeded that declared in GSTR-9 for FY 2019-20.

The society attributed the difference to clerical errors and relied on its annual return and tax payment records.

The Tribunal observed that GSTR-9 is an annual return under Section 44 and stated that a taxpayer has the right to correct figures declared in monthly or quarterly returns in the annual return for that year.

However, the Bench did not conclusively accept the society’s explanation for the difference. Since the ITC issue was being remanded, it also permitted the society to explain the reconciliation difference before the original authority.

The authority was directed to consider that explanation and determine whether any differential tax remained payable.

The Tribunal recorded that counsel for the society agreed to remand and that the department had no objection.

GSTAT directed fresh adjudication, with additional evidence to be taken if necessary. The adjudicating authority must address the society’s principal grounds and pass fresh orders on the merits of the tax demand, interest and penalty.

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