Fresh demand for reversal of the same ITC is not valid merely because it was reversed beyond the prescribed time

The Hon'ble Gujarat High Court in Ajay Industries &Anr. v. Union of India & Ors. [SCA No. 2951 of 2025 dated April 16, 2025] held that once Input Tax Credit ("ITC") is reversed prior to issuance of a Show Cause Notice("SCN"), the authorities cannot raise a fresh demand on the same amount without verifying Goods and Services Tax Network("GSTN") data. The Court further emphasized that the proper course was to either recredit the ITC already reversed with retrospective effect or to charge only interest and penalty.

Facts:

M/s. Ajay Industries ("the Petitioner"), a partnership firm engaged in the manufacture and sale of cotton seed oil, and is registered under the Central Goods and Services Tax Act, 2017 ("the CGST Act") regime. Initially, the Petitioner was under the belief that although the cotton seed oil is taxable,its by-product- cotton oil cake, is exempt, hence they availed full ITC and filed Returns for FY 2017-18 accordingly. However, subsequently, upon being advised, the Petitioner reversed proportionate ITC under Section 17(2) of the CGST Act to the extent of ratio of turnover exempt supplies vis-a-vis total turnover. This reversal for FY 2017-18 and 2018-19 was reflected in the FORM GSTR-3B return for March 2020

The Department ("the Respondent"), nevertheless, issued anSCN under Section 73 of the CGST Act for the FY 2017-18, and subsequently passed an Order-in-Original ("the Impugned Order")confirming the demand of ITC allegedly availed on exempt goods, without noting the prior reversal by the Petitioner.

Hence, aggrieved by the Impugned Order, the Petitioner filed the present Writ Petition.

Issue:

Whether a fresh demand for reversal of the same ITC is valid merely because it was reversed beyond the prescribed time?

Held:

The Hon'ble Gujarat High Court in SCA No. 2951 of 2025 held as under:

• Observed that, it is admitted that the Petitioner has reversed the ITC prior to issuance of the SCN. However, the Petitioner has reversed such ITC beyond the time prescribed under Section 39 (9) of the CGST Act and therefore, the Respondent without considering the fact that the Petitioner has already reversed the ITC has again asked the Petitioner to reverse the ITC, resulting in double payment of tax.
• Noted that, the Respondent ought to have issued the show-cause notice for interest or penalty to be levied for late reversal of the Input Tax Credit by the petitioner as per the provisions of Section 50 of the CGST Act.
• Observed that, as the Petitioner has not filed any reply to the SCNin spite of providingsufficient opportunity and considering the fact that there was already reversal ofthe ITC, the Respondentwithout verifying the data available on the GSTN portal, haspassed the Impugned Order relying only upon Section 39 (9) of the CGST Act.
• Observed that, the SCNought to have been issued for the purpose of levy ofinterest or penalty for late reversal of ITC and not for availing of the ITC on the exempted goods.
• Held that, the Respondent was either required to pass an order to recredit the ITC already reversed by the Petitioner with retrospective effect or to charge only interest and penalty as per the provisions of the CGST Act.
• Held that, the Respondent ought to pass a fresh de-novo order after providing an opportunity of hearing to the Petitioner in accordance with law.

Our Comments:

Section 39 of the CGST Act governs "Furnishing of Returns". Further, Section 39(9) of the CGST Act states that if a registered person finds any omission or error in a previously filed return (not due to audit or enforcement), they must rectify it in the return for the month/quarter in which it is noticed and pay any tax and interest due.

Section 73 of the CGST Act governs "Determination of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized for any reason other than fraud or wilful misstatement or suppression of facts." Further, Section 73(1) of the CGST Act states that the Proper Officer can issue a SCN to the taxpayer, demanding the unpaid tax along with interest and a penalty and it must be done within three years from the due date for filing the annual return for the relevant financial year.

Section 50 of the CGST Act governs "Interest on delayed payment of tax." Further, Section 50(1) of the CGST Act states that if a registered person fails to pay tax within the prescribed time, they are liable to pay interest on the unpaid tax at a rate not exceeding 18% (as notified) for the period during which the tax remains unpaid.

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