2025 (6) TMI 349 - HC - GST

Appealable order - Demand of ineligible input tax credit used for discharging outward tax liability for the financial year 2017-18 to 2022-23 in contravention to N/N. 46/2017 Central Tax (Rate) dated 15.11.2017 - Short payment of tax - recovery alongwith interest and penalty - HELD THAT - On a prima facie view it appears that there would be duplication of two demands as demand qua reversal of availed ITC and demand qua utilisation of ITC would be one and the same thing. But both have been separately demanded in the impugned order. Accordingly in the peculiar facts of the case the Petitioner is relegated to the Appellate Authority. However the pre-deposit shall be only in respect of demands under paragraphs (ii) (iii) (iv) of the operative part of impugned order. The appeal is permitted to be filed by 15th July 2025 along with the requisite pre-deposit. If any deposits have already been made by the Petitioner adjustment thereof shall be given qua the pre-deposit - Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the petitioner, operating both a sweetmeat shop and a restaurant, is entitled to avail Input Tax Credit (ITC) on the GST paid, given that GST rates differ for the restaurant (5%) and the sweetmeat shop (higher rates).

(b) Whether the Show Cause Notice (SCN) and the consequent demand for recovery of ineligible ITC and short payment of GST, along with interest and penalties, are legally sustainable under the provisions of the CGST Act, 2017 and related State and IGST Acts.

(c) Whether the impugned order improperly duplicates demands by simultaneously demanding reversal of availed ITC and recovery of tax for utilization of ITC, thereby causing double recovery.

(d) The procedural issue regarding the appellate remedy available to the petitioner against the impugned order and the conditions regarding pre-deposit for filing such appeal.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Entitlement to Input Tax Credit (ITC) by a composite business having both sweetmeat shop and restaurant operations

Relevant legal framework and precedents: The CGST Act, 2017, along with the SGST and IGST Acts, governs the levy and collection of GST and the entitlement to ITC. Notification No. 46/2017 Central Tax (Rate) dated 15.11.2017 specifically regulates ITC eligibility for various categories of supply including restaurants.

Court's interpretation and reasoning: The Court examined the petitioner's contention that the sweetmeat shop operations are eligible for ITC, whereas the restaurant operations, taxed at 5%, are not. The SCN was issued on the premise that the petitioner cannot avail ITC for the restaurant segment. The petitioner argued that since the sweetmeat shop is entitled to ITC, the overall claim of ITC should not be disallowed.

Key evidence and findings: The petitioner runs a restaurant with seating capacity for about 30 persons alongside the sweetmeat shop. The GST charged on restaurant services is at a concessional rate of 5%, while the sweetmeat shop is subject to higher GST rates. The SCN and impugned order identified ineligible ITC availed in contravention of the notification and statutory provisions.

Application of law to facts: The Court noted that the law restricts ITC on certain supplies such as restaurant services where GST is charged at a concessional rate. The sweetmeat shop, being a separate taxable supply at a higher GST rate, is eligible for ITC. However, the petitioner's accounts and returns must clearly segregate these activities to claim ITC legitimately.

Treatment of competing arguments: The petitioner's contention that ITC availed on sweetmeat shop supplies should not be disallowed was acknowledged. However, the revenue's stand that ITC availed on restaurant supplies is ineligible was upheld. The Court did not find merit in the petitioner's claim to wholly negate the SCN on this ground.

Conclusions: The petitioner is entitled to ITC on sweetmeat shop supplies but not on restaurant services taxed at 5%. The SCN's demand for reversal of ineligible ITC on restaurant supplies is sustainable.

Issue (b): Legality and sustainability of the demands raised under Section 74(1) of CGST Act, 2017

Relevant legal framework and precedents: Section 74(1) of the CGST Act deals with cases of tax evasion and prescribes recovery of tax along with interest and penalty. The impugned order invoked this provision for recovery of ineligible ITC, short payment of tax, interest under Section 50, and penalties under Sections 74 and 125.

Court's interpretation and reasoning: The Court considered the demands raised in the impugned order, which included:

• Demand of ineligible ITC amounting to over Rs. 11 crores;
• Short payment of tax of approximately Rs. 17 lakhs;
• Additional demand of ineligible ITC of nearly Rs. 15 crores;
• Recovery of excess ITC availed compared to GSTR-2A;
• Interest and penalties on the above amounts.

The Court observed that the demands were made under the relevant statutory provisions and notifications. It recognized the statutory authority's power to recover such amounts in cases of tax evasion or incorrect ITC claims.

Key evidence and findings: The impugned order detailed the quantum of demands and the statutory basis for each. The petitioner did not dispute the factual basis of the amounts but challenged the legal basis for some demands.

Application of law to facts: The Court found that the demands were prima facie in accordance with the CGST Act and related laws. The petitioner's challenge was primarily on the ground of duplication and entitlement to ITC, which was addressed separately.

Treatment of competing arguments: The petitioner argued that the demands were excessive and partly duplicative. The revenue contended that all demands were valid and appealable.

Conclusions: The Court upheld the legal basis of the demands but allowed the petitioner to challenge them before the Appellate Authority with certain conditions on pre-deposit.

Issue (c): Alleged duplication of demand for recovery of ITC and tax utilization

Relevant legal framework and precedents: The principle against double recovery is well-established. Section 74(11) provides for conclusion of proceedings upon payment of tax, interest, and penalty within a stipulated period.

Court's interpretation and reasoning: The Court noted that the impugned order separately demanded reversal of availed ITC and recovery of tax for utilization of ITC, which prima facie appeared to be duplicative demands for the same amount.

Key evidence and findings: The impugned order's paragraphs (i) and (iii) both related to ineligible ITC demands, while paragraph (iv) related to excess ITC availed compared to GSTR-2A. The petitioner contended that this amounted to double recovery.

Application of law to facts: The Court recognized the petitioner's grievance and observed that the demands under paragraphs (ii), (iii), and (iv) should be subject to pre-deposit for the purpose of appeal, implying that the issue of duplication required adjudication by the Appellate Authority.

Treatment of competing arguments: The petitioner's argument on duplication was accepted as a prima facie valid concern. The revenue did not dispute the appealability but maintained the correctness of the demands.

Conclusions: The Court did not decide on the duplication issue on merits but relegated the petitioner to the appellate forum for detailed adjudication, restricting pre-deposit to certain demands only.

Issue (d): Appellate remedy and pre-deposit conditions

Relevant legal framework and precedents: The CGST Act provides for appeals against orders passed under Section 74. Pre-deposit of a portion of the demand is generally required for admission of appeal.

Court's interpretation and reasoning: The Court allowed the petitioner to file appeal by 15th July 2025 with requisite pre-deposit limited to demands under paragraphs (ii), (iii), and (iv) of the impugned order. It also directed adjustment of any deposits already made.

Key evidence and findings: The petitioner had not yet filed an appeal. The Court clarified that if the appeal is filed within the stipulated time, it shall be heard on merits and not dismissed on limitation grounds.

Application of law to facts: The Court balanced the revenue's interest in recovery with the petitioner's right to challenge the order, ensuring procedural fairness.

Treatment of competing arguments: The petitioner sought relief from full pre-deposit; the Court granted partial relief by limiting pre-deposit to specific demands.

Conclusions: The petitioner is permitted to file appeal with partial pre-deposit and the appeal will be heard on merits.

3. SIGNIFICANT HOLDINGS

The Court held:

"On a prima facie view, it appears that there would be duplication of two demands as demand qua reversal of availed ITC and demand qua utilisation of ITC would be one and the same thing. But both have been separately demanded in the impugned order. Accordingly, in the peculiar facts of the case, the Petitioner is relegated to the Appellate Authority. However, the pre-deposit shall be only in respect of demands under paragraphs (ii), (iii) & (iv) of the operative part of impugned order."

Core principles established include:

• ITC eligibility must be determined distinctly for different taxable supplies, especially where GST rates and notifications differ (e.g., restaurant services vs. sweetmeat shop supplies).
• Demands raised under Section 74(1) for recovery of ineligible ITC, short payment of tax, interest, and penalties are sustainable if supported by statutory provisions and notifications.
• Where there is a prima facie duplication in demands, the aggrieved party must be afforded an opportunity to challenge before the Appellate Authority.
• Partial pre-deposit requirements can be imposed to balance the interests of revenue and the taxpayer, and appeals filed within stipulated time shall not be dismissed on limitation grounds.

Final determinations:

The petitioner's challenge to the SCN and impugned order was not accepted outright. The petitioner was allowed to file appeal with partial pre-deposit. The Court refrained from adjudicating the duplication issue on merits, leaving it to the Appellate Authority. The entitlement to ITC on sweetmeat shop supplies was recognized, but ITC on restaurant supplies taxed at 5% was disallowed as per law.