Voluntary GST Reversal Protected: Gujarat HC Rules Against Double Recovery of Input Tax Credit

The Hon'ble High Court of Gujarat in Ajay Industries v. Union of India, R/SPECIAL CIVIL APPLICATION NO. 2951 OF 2025 dated April 16, 2025 held that where a petitioner mistakenly claimed Input Tax Credit (ITC) on exempted by-product/waste product generated during manufacture, but upon being properly advised, reversed it prior to issuance of show cause notice (SCN), though beyond time prescribed under Section 39(9), Authorities should not have asked petitioner to reverse ITC again as it would result into double payment; impugned SCN ought to have been issued for purpose of levy of interest or penalty for late reversal of ITC only.

Facts of the Case

The Petitioner, Ajay Industries, is a partnership firm engaged in the business of manufacture and sale of cotton seed oil and is duly registered under the provisions of the Central/State Goods and Services Tax Act, 2017 (GST Act).

The cotton seed oil manufactured by the Petitioner is taxable under the GST Act and therefore, the Input Tax Credit (ITC) is admissible under Section 16 of the GST Act. However, the by-product/waste product - cotton oil cake - is exempt from tax under the provisions of the GST Act.

The Petitioner mistakenly believed that since the exempt by-product/waste product was incidentally generated during the course of manufacture, they were entitled to full ITC. Accordingly, they filed monthly returns as well as annual returns for the Financial Year 2017-18 claiming the entire ITC.

Upon being advised that non-reversal of ITC could lead to demand being raised by the authorities, the Petitioner reversed proportionate ITC under Section 17(2) of the GST Act to the extent of the ratio of turnover of exempt supplies vis-à-vis total turnover. This reversal for the Financial Years 2017-18 and 2018-19 was done in the monthly return in Form GSTR-3B filed for the month of March 2020 (before the SCN was issued but after the time limit prescribed under Section 39(9)).

The Petitioner received a show-cause notice dated September 28, 2023, under Section 73 of the GST Act proposing demand mainly on the ground of non-reversal of the ITC attributable to the exempt supplies along with other miscellaneous issues. The Petitioner requested additional time due to Diwali holidays but could not file a reply to the SCN.

Without granting a mandatory personal hearing as provided under Section 75(4) of the GST Act, the impugned order dated December 21, 2023, was passed by the Respondent Authority confirming the demand as per the show-cause notice, without noticing the fact that the ITC sought to be disallowed had already been reversed by the Petitioner.

The Petitioner claimed they were not aware of this order as it was only uploaded on the portal and not served physically or via registered email. They learned about it only when their Demat Account was attached on May 24, 2024. Subsequently, they filed an appeal under Section 107 of the GST Act with an application to condone the delay.

However, the First Appellate Authority rejected the appeal by order dated November 28, 2024, on the ground that uploading of the impugned order on the portal was a valid mode of service and the Appellate Authority had no power to condone the delay. The Respondent Authority also attached the bank account of the Petitioner by notice dated March 4, 2025, for recovery of outstanding dues.

Issue

Whether tax authorities can demand reversal of ITC on exempt supplies when the assessee has already reversed the same prior to issuance of show cause notice, though beyond the time prescribed under Section 39(9) of the GST Act?

Held by the Court

The Hon'ble High Court of Gujarat in R/SPECIAL CIVIL APPLICATION NO. 2951 OF 2025 held that:

• The Court observed that it was not denied by the respondents that the Petitioner had already reversed the Input Tax Credit prior to the issuance of the show-cause notice. The Court noted that only because the Petitioner could not file a reply to the show-cause notice pointing out these facts, it resulted in the passing of the impugned Order-in-Original under Section 73 of the GST Act on the ground that the Petitioner did not reverse the ITC within the time prescribed under Section 39 of the GST Act.

  
  

• The Court acknowledged that under the amended provisions of Section 16(5) of the GST Act, the Petitioner was entitled to file returns for claiming Input Tax Credit for financial years 2017-18 to 2020-21. However, in this case, the Petitioner had incorrectly claimed the ITC on exempt goods which was required to be reversed as per the proviso to Section 39(9) of the GST Act.

  
  

• The Court noted that the Petitioner had reversed such ITC beyond the time prescribed under Section 39(9) of the GST Act. Despite this, the Court found that the respondent Authorities, without considering the fact that the Petitioner had already reversed the ITC, had again asked the Petitioner to reverse the ITC. This would result in double payment of tax by the Petitioner.

  
  

• The Court held that the proper course of action for the respondent Authorities would have been to issue a show-cause notice for interest or penalty to be levied for late reversal of the ITC by the Petitioner as per the provisions of Section 50 of the GST Act, rather than demanding the reversal again.

  
  

• The Court further noted that in spite of providing sufficient opportunity, the Petitioner had not filed any reply to the SCN. However, considering that there was already a reversal of the ITC, the respondent Authority, without verifying the data available on the GSTN portal, had passed the impugned order relying only upon the provisions of Section 39(9) of the GST Act.

  
  

• The Court determined that the impugned show-cause notice ought to have been issued for the purpose of levy of interest or penalty for late reversal of ITC by the Petitioner and not for availing of the ITC by the Petitioner on the exempted goods. In such circumstances, the Court held that the respondent Authority 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 GST Act.

  
  

• Considering the facts emerging from the record and the provisions of the Act, the Court quashed and set aside the impugned Order-in-Original and remanded the matter to the respondent Authority to pass a fresh de-novo order after providing an opportunity of hearing to the Petitioner in accordance with law and to consider the amount deposited by the Petitioner accordingly.

  
  

Relevant Sections

"Section 16(5) of CGST Act, 2017" "Section 17(2) of CGST Act, 2017" "Section 39(9) of CGST Act, 2017" "Section 50 of CGST Act, 2017" "Section 73 of CGST Act, 2017" "Section 75(4) of CGST Act, 2017" "Section 169(d) of CGST Act, 2017"

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