Madras High Court Quashes GST Order; Holds Revenue Must Verify Transitional Credit Claims with GSTR-2A Data. Thus, the incomplete verification of the stock of goods and books of account by the Assessee cannot be the basis of determining his tax liability. It is remitted back to the GST Department to be dealt with in accordance with law.
Background of the Case
This petition is filed to challenge the Order-in-Original No. 4/2023 (GST-DC) dated 27.3.2023 (‘Original Order’ for short for ‘Order-in-Original’) passed by the respondent 1 and further a summary order in Form GST DRC-07 dated 25.7.2024 (‘Summary DRC-07’) confirmed by the respondent 1 in relation to the said Original Order raising a demand of Rs. 12,41,111/-.
The Order-in-Original challenges by the petitioner was the Order-in-Original No. 4/2023 (GST-DC) dated 27th March 2023 [hereinafter referred to as the ‘Original Order’] and a subsequent summary order in Form GST DRC-07 [hereinafter referred to as the ‘summary assessment order’] both imposed by the respondent department for confirmation of adverse tax demand asserted by the department in respect of the disputed Transitional Input Tax Credit [hereinafter referred to as the ‘ITC’] claimed and properly registered by the petitioner in his returns in FORM TRAN-01 for the stock of goods of the petitioner as on 30/06/2017. The Original Order was confirmed by the department by a detailed assessment made by the department and subsequently a summary assessment was also made and both the assessments confirmed an adverse tax demand against the petitioner. The said demand raised by the department were challenged by the petitioner through this writ petition.
Shri Naveen Nathan learned counsel for the petitioner pointed out paragraph 4 of the affidavit in opposition and submitted that though the stock statement of the bank for the year 2017 were not produced for the reason stated in paragraph 4 of the affidavit in opposition, the petitioner had in his reply dated 02.02.2020 and also in the reply dated 01.02.2021 furnished the details of the same which were incorporated in the SCN and, therefore, the department was bound to consider the same while passing the assessment order.
The Court’s Observations on Forensic Verification
Here in this case, learned Single Judge of Madras High Court examined into the mechanism for allowing transitional input tax credit and held the Revenue to be bound to verify the claims of Transitional Input Tax Credit claimed by taxpayer in his returns of taxation in terms of Section 140 of GST Act read with Rule 6 and 7 of Transition Rule, 2017 by comparing the same with GSTR-2A.
The stock transferred through the FORM TRAN-01, would be subsequently supplied and the said stock would also get reflected in the subsequent monthly returns of GSTR-1 and GSTR-3B, annual returns of GSTR-9 and the reconciliation statement of GSTR-9C of the succeeding periods.
The Bench noted:
Whether stock was being held by the Assessee as on 30th June, 2017 could be known only by a forensic examination of the stock transferred on or after 1st July, 2017 with the returns that were auto populated in GSTR-2A for subsequent periods and accordingly claimed as ITC in the ITC ledger of the respective ledgers of the goods in the returns of subsequent months i.e. in GSTR-1 and GSTR-3B. The said examination could have been done by the Department while confirming the demand under investigation. In any case, an incomplete verification of the stock records with the corresponding returns cannot be the basis of confirmation of demand.
Even though it was the case of the assessee to prove the stock as on 30th June, 2017, as required to be credited in their accounts as transitional input credit under Section 140 of the GST Enactments, the Revenue authorities were required to cross examine the same and also verify the same with the auto populated GSTR 2A for the succeeding months and also verify the ITC ledger entries received there in.
Therefore the High Court held that the Order of Confirmation of tax liability in question cannot be sustained in law.
The Verdict and Conditions for Adjudication
As a measure of his earnest endeavor to protect the revenue interest of the Department and at the same time to grant a fair hearing to the assessee, Mr.Kumaresan, learned counsel for the petitioner undertakes to remit 25% of the tax in question into the Electronic Cash Ledger within a period of 30 days from today.
Delivering its final directions, the Court ordered:
Therefore, in the tax recovered, in the manner aforesaid, would stand to the credit of the Assessee, in the first place, the matter be remitted to the Department to hold de novo adjudication, on the basis of evidence available on record.
The amount of twenty five lakhs of rupees by cash or by credit of Electronic Cash Ledger under the head ‘Central Tax’ as per the rules mentioned under Rule 136 of CGST Rules, 2017 within thirty days from the date of receipt of a copy of this order.
Comprehensive Reply: Original Order in Original (hereinafter referred to as “Order in Original”) would form part of SCN issued in the year 2021 to the Petitioner. As promised by learned Counsel for Petitioner, a comprehensive reply be filed by the Petitioner addressing all observations made by the Authority in the replies already filed by the Petitioner in the year 2020 and 2021 and such reply along with documents in support of proof of stock be filed before the Authority within a period of thirty days from date of receipt of this order.
As soon as the aforesaid amount is paid by the petitioner, the department shall fix a date for holding personal hearing to the petitioner and pass speaking order within a period of three months from the date of such hearing is held.
Significance of the Judgment
This case would be pertinent to the taxpayers who have been facing disputes in relation to the Transitional Input Tax Credit (ITC) already been utilized / paid or carried forward in the returns filed by taxpayers under GST regime. In terms of the record of this case, incomplete verification of physical stock of goods held by taxpayer as on 01st day of July 2017, would not suffice for Revenue to confirm tax liability. It would be necessary for Revenue to carry out a thorough forensic verification of the records extracted from the GSTR 1 returns, GSTR 3B returns and Auto populated GSTR 2A returns on the basis of stock received by taxpayer after 01st day of July 2017.