2025 (4) TMI 1146 - HC - GST

Recovery of wrongfully availed ITC - rejection of application of rectification of the order on the ground that there was no error apparent on the face of the record in the said order and the said order was a reasoned and speaking in itself and was passed following the due process of natural justice - HELD THAT - It appears that though in the case of the petitioner there was a movement of the goods from the factory to the godowns and there was no actual sale of the goods as per the scheme of the GST Act the tax is now levied on the supply of the goods i.e. movement of the goods from one place to another and accordingly the petitioner was required to obtain the GST number for its factory and different godowns situated at different locations in the country. Accordingly the petitioner obtained the GSTIN numbers in the State of Gujarat and from September 2018 had obtained the GSTIN number for the warehouse situated at Surat. It appears that by mistake the petitioner referred to the GSTIN number which was obtained for the State of Gujarat was wrongly stated for the supplies received at warehouse/godown situated at Surat by mentioning earlier GSTIN No. 24AAACG4464B5Z0 instead of GSTIN No. 24AAACG4464B7ZY. On the part of the petitioner there was no excess ITC claimed and only because of the wrong mentioning of the GSTIN number in Form-GSTR-1 there was a mismatch between the Form-GSTR-3-1 and GSTR-3B which was duly rectified by the petitioner later on and the respondent therefore could not have passed the impugned order raising demand on the basis of the mismatch between the form GSTR-1 and GSTR-3B inspite of the rectification/reconciliation made by the petitioner later on. On perusal of compliance report it is clear that the same is contradictory or it appears that the respondents without careful examination of the submissions of the tax payer reconciliation statement and audit findings have passed impugned order-in-original and cursorily rejected the rectification applications filed by the petitioner resulting into the raising of the huge demand on the petitioner for no fault on part of the petitioner. Conclusion - The impugned order-in-original is liable to be quashed and set aside because it was passed without proper consideration of the rectifications made by the petitioner and the reconciliation statements and was contrary to the material on record. The impugned order-in-original is liable to be quashed and set aside - Stand over to 16/04/2025.

Summary

The core legal questions considered in this case include:

1. Whether the petitioner wrongly availed Input Tax Credit (ITC) of Integrated Goods and Services Tax (IGST) under the provisions of Section 16(2) of the Central Goods and Services Tax (CGST) Act, 2017, and Section 20 of the IGST Act, 2017, thereby justifying the demand and recovery of ITC along with interest and penalty under Section 73(1) of the CGST Act, 2017.

2. Whether the petitioner's rectification applications under Section 161 of the CGST Act, 2017, challenging the order confirming the demand, were rightly rejected on the ground that there was no error apparent on the face of the record.

3. Whether the adjudicating authority and respondents acted in accordance with the principles of natural justice and proper examination of evidence and submissions made by the petitioner.

4. The applicability and interpretation of procedural requirements under the GST law, including the filing of GSTR-1 and GSTR-3B returns, and the impact of errors in GSTIN disclosure on ITC availment.

5. The scope and effect of audit observations and compliance reports by the Directorate General of Audit (Central) and the role of reconciliation statements and rectifications made by the petitioner in the context of ITC claims.

Issue-wise Detailed Analysis:

Issue 1: Wrongful Availment of ITC and Demand under Section 73(1) of the CGST Act

The legal framework governing ITC availment is primarily Section 16(2) of the CGST Act, which mandates that ITC can be availed only if the recipient possesses a tax invoice or debit note issued by the supplier, has received the goods or services, and has made payment of the value of supply along with the tax payable to the supplier. Section 73(1) empowers the tax authorities to recover wrongly availed ITC along with interest and penalty.

The petitioner was engaged in manufacturing and stock transfer of goods from its factory in Maharashtra to its godown in Surat, Gujarat, which had a separate GSTIN registration from September 2018. The petitioner admitted that while issuing invoices for stock transfer, the GSTIN of the Surat godown was wrongly mentioned as the old GSTIN instead of the new one in Form GSTR-1 for FY 2018-19. This error was subsequently rectified in returns for subsequent months and reflected in GSTR-2A and GSTR-9 for FY 2019-20.

The respondents issued a show cause notice alleging excess ITC availed and demanded recovery of Rs. 45.12 crores approximately, asserting that the petitioner violated Section 16(2)(c) by availing ITC on invoices where the supplier had not paid the tax.

The petitioner submitted detailed reconciliation statements and explanations showing that the discrepancies were due to inadvertent errors in GSTIN disclosure and were rectified in subsequent returns. The petitioner also relied on Chartered Accountant certificates confirming the correctness of ITC claimed.

The respondents initially confirmed the demand but later, through an affidavit and compliance report, acknowledged that the mismatches were due to data processing discrepancies and amendments made by suppliers in their GSTR-1 returns after initial filing, not indicating actual non-payment of tax. The compliance report recommended closure of audit observations.

The Court found that the petitioner had made genuine rectifications and demonstrated that the ITC availed was admissible and correct. The demand was based on apparent mismatches rather than substantive non-compliance.

Issue 2: Rejection of Rectification Applications under Section 161 of the CGST Act

The petitioner filed three rectification applications under Section 161 seeking correction of errors in the order confirming the demand. These applications were summarily rejected by respondent no. 4 on the ground that no error apparent on the face of the record was found and that the order was reasoned and speaking.

The petitioner contended that the rejection was cryptic, non-speaking, and passed without affording an opportunity of hearing, thus violating principles of natural justice. It was argued that the rectification applications contained detailed reconciliations and documentary evidence which were not considered.

The Court observed that the rejection was indeed cursory and failed to apply mind to the submissions and documents provided. The respondents ignored the reconciliation statements and compliance reports that supported the petitioner's case. This amounted to non-application of mind and procedural impropriety.

Issue 3: Compliance with Principles of Natural Justice and Procedural Fairness

The petitioner argued that the adjudicating authority acted with preconceived mindset and did not properly consider the petitioner's written submissions and evidence. The petitioner also submitted that it was never called upon to produce certain documents as prescribed by Circular No. 183/15/2022-GST, which requires proper officers to seek details of invoices on which ITC is claimed but not reflected in GSTR-2A.

The respondents contended that the petitioner failed to produce requisite documents such as tax invoices, proof of payment, and receipt of goods, which are conditions precedent under Section 16(2) of the CGST Act for ITC entitlement.

The Court noted that the petitioner had submitted reconciliation statements and CA certificates and had responded to show cause notices with detailed explanations. Moreover, the respondents did not follow the procedure mandated by the Circular to seek specific details before confirming the demand. This procedural lapse was a violation of natural justice and proper adjudicatory process.

Issue 4: Interpretation of GST Return Filing and Impact of GSTIN Errors

The petitioner's case revolved around the incorrect GSTIN number mentioned in Form GSTR-1 for stock transfers, which was later rectified. The legal question was whether such errors, when rectified within prescribed time, can result in disallowance of ITC and demand for recovery.

The Court observed that the GST law requires accurate disclosure of GSTINs in returns to ensure correct credit flow. However, inadvertent errors rectified in time and reflected in subsequent returns should not result in penal consequences if the underlying tax payments are made and goods are received.

The respondents' own affidavit and compliance report confirmed that the discrepancies arose from amendments made by suppliers in their GSTR-1 returns, causing mismatches but not indicating actual non-payment of tax. Thus, the Court held that the petitioner's rectifications were in accordance with law and justified the ITC claims.

Issue 5: Effect of Audit Observations and Compliance Reports

The audit observations by the DG Audit (Central) had initially raised concerns about excess ITC availment. However, after detailed examination of submissions, reconciliation statements, and verification reports by jurisdictional officers, the audit observations were found to be based on data mismatches rather than substantive non-compliance.

The compliance report recommended closure of audit observations, confirming the admissibility and correctness of ITC availed by the petitioner. The Court placed significant reliance on this report to conclude that the demand was unjustified.

Significant Holdings:

The Court held that:

"The impugned order-in-original is liable to be quashed and set aside" because it was passed without proper consideration of the rectifications made by the petitioner and the reconciliation statements, and was contrary to the material on record.

"The rejection of the rectification applications under Section 161 of the CGST Act was cryptic, non-speaking, and without application of mind, resulting in violation of principles of natural justice."

"The discrepancies in ITC claims were due to inadvertent errors in GSTIN disclosure and subsequent rectifications, which were duly reflected in subsequent returns and compliance reports, and did not indicate actual non-payment of tax by the suppliers."

"The respondents failed to follow the procedure prescribed in Circular No. 183/15/2022-GST by not seeking specific details of invoices on which ITC was claimed but not reflected in GSTR-2A, thereby violating procedural fairness."

"The audit observations have been settled and closed based on compliance reports confirming the correctness of ITC availed by the petitioner."

"The Court proposes to impose exemplary costs on the respondents for passing orders contrary to the submissions and reconciliation statements, and without verification of facts."