2025 (6) TMI 1257 - HC - GST

Challenge to order issued u/s 107 of the WBGST/CGST Act 2017 - challenge to order passed by the proper officer u/s 73 of the said Act for the tax period of July 2017 to March 2018 - wrongful availment of ITC - HELD THAT - This is not a case of evasion of tax but a case of wrongful availment of ITC by the petitioners which had later voluntarily been reversed by the petitioners by filing Form GST DRC 03 though in the aforesaid process there had been inadvertent error on the part of the petitioners in not selecting the relevant tax period for which such reversal was made in the respective DRC 03 forms. However the fact that the reversal of the entirety of ITC was effected cannot be overlooked. It is found that though the proper officer (adjudicating authority) as also the appellate authority has acknowledged such aspect and despite observing that the ITC had been reversed voluntarily by the petitioners by filing Form GST DRC 03 the benefit thereof has not been extended to the petitioners citing technical grounds. It was held in the case of Rajesh Real Estate Developers Private Limited vs. Union of India 2024 (2) TMI 1175 - BOMBAY HIGH COURT that the inadvertent error in Form GST DRC 03 can be permitted to be corrected. The orders passed both by the proper officer (adjudicating authority) as also by the appellate authority dated 27th December 2023 and 21st March 2025 respectively cannot be sustained and the same are accordingly set aside - the matter is remanded back to the proper officer for adjudication - Petition disposed off by way of remand.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter include:

• Whether the petitioners, engaged in the manufacture of poultry feed, wrongly availed input tax credit (ITC) under the relevant GST provisions, and if so, whether such wrongful availment constitutes tax evasion or a mere inadvertent error.
• Whether the voluntary reversal of ITC by the petitioners through filing Form GST DRC 03, albeit with inadvertent errors in specifying the relevant tax periods, suffices to rectify the wrongful availment and absolve the petitioners of liability.
• Whether the adjudicating authority and appellate authority erred in rejecting the petitioners' reversal of ITC on the ground that the reversal was consolidated for multiple financial years into a single period, thereby disallowing the reversal for the tax period 2017-2018.
• Whether the recovery notice issued under Section 79 of the WBGST/CGST Act, 2017 is sustainable in light of the voluntary reversal of ITC.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Wrongful Availment of Input Tax Credit and its Nature (Evasion vs. Inadvertent Error)

Relevant Legal Framework and Precedents: The WBGST/CGST Act, 2017 governs the levy and collection of GST, including provisions relating to input tax credit under Sections 39, 61, 73, 79, and 107. Section 73 deals with determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful misstatement or suppression of facts. Section 107 provides for issuance of show-cause notices. The distinction between tax evasion and inadvertent error is critical in determining the extent of liability and the possibility of relief.

Court's Interpretation and Reasoning: The Court found prima facie that the petitioners had wrongly availed ITC but this was not a case of deliberate tax evasion. Instead, it was a case of wrongful availment arising from inadvertence. The petitioners had not utilized the ITC and had voluntarily reversed the same upon discovery of the discrepancy by the anti-evasion wing of the CGST authorities.

Key Evidence and Findings: The petitioners' returns under Section 39 wrongly availed ITC on sales of poultry feed, which are not taxable. However, the petitioners did not utilize the ITC and reversed the entire amount voluntarily through Form GST DRC 03. The reversal was acknowledged by both the adjudicating and appellate authorities.

Application of Law to Facts: The Court emphasized that wrongful availment without utilization and with voluntary reversal does not equate to tax evasion. The legal framework allows for correction of inadvertent errors, and the petitioners' actions fell within this scope.

Treatment of Competing Arguments: The State acknowledged the wrongful availment but also conceded the voluntary reversal. The authorities, however, took a strict view on the technicalities of the reversal process, which the Court found to be an overly rigid approach not warranted by the facts.

Conclusions: The Court concluded that the case was one of inadvertent wrongful availment corrected by voluntary reversal, not tax evasion.

Issue 2: Validity of Voluntary Reversal of ITC Despite Inadvertent Error in Specifying Tax Periods

Relevant Legal Framework and Precedents: Section 73 of the Act allows for recovery of wrongly availed ITC, but also contemplates rectification. Precedents relied upon include judgments from the Bombay High Court and Kerala High Court, as well as this Court's prior ruling, which recognize that inadvertent errors in Form GST DRC 03 can be permitted to be corrected.

Court's Interpretation and Reasoning: The Court noted that the petitioners reversed the entire ITC amount but inadvertently consolidated the reversal for multiple financial years into a single period on the DRC 03 forms, omitting the 2017-2018 period. The adjudicating and appellate authorities rejected this consolidation, refusing to accept the reversal for 2017-2018.

Key Evidence and Findings: The chart annexed to the writ petition demonstrated the reversal was intended to cover tax periods from 2017-2018 through 2021-2022, but the DRC 03 forms only reflected three of these years. The authorities' refusal was based on a technicality rather than substantive non-compliance.

Application of Law to Facts: The Court applied the principles from the cited precedents, holding that such inadvertent errors in the reversal forms should be allowed to be corrected rather than lead to rejection of the entire reversal.

Treatment of Competing Arguments: The petitioners argued for leniency and correction; the State and authorities emphasized strict compliance. The Court favored a pragmatic approach consistent with established precedents.

Conclusions: The Court held that the reversal should be accepted and the matter remanded for adjudication with directions to consider the reversal in its entirety, allowing correction of inadvertent errors.

Issue 3: Sustainability of Recovery Notice under Section 79

Relevant Legal Framework: Section 79 authorizes recovery of tax, interest, or penalty. Its issuance depends on the existence of a valid demand following due process.

Court's Interpretation and Reasoning: Given the Court's findings that the ITC was voluntarily reversed and the reversal should be accepted notwithstanding the inadvertent error, the recovery notice premised on the alleged outstanding liability could not be sustained.

Key Evidence and Findings: The recovery notice dated 5th June, 2025 was issued after the orders under Section 73 and 107, which the Court set aside.

Application of Law to Facts: Since the underlying adjudication was set aside and remanded, the recovery notice lacked a valid foundation.

Conclusions: The recovery notice was quashed.

3. SIGNIFICANT HOLDINGS

The Court held that:

"This is not a case of evasion of tax but a case of wrongful availment of ITC by the petitioners which had later voluntarily been reversed by the petitioners by filing Form GST DRC 03, though in the aforesaid process there had been inadvertent error on the part of the petitioners in not selecting the relevant tax period for which such reversal was made in the respective DRC 03 forms."

"The fact that the reversal of the entirety of ITC was effected cannot be overlooked."

"The benefit thereof has not been extended to the petitioners citing technical grounds. As rightly pointed out by Mr. Kanodia, by placing reliance on the judgment delivered in the case of Rajesh Real Estate Developers Private Limited vs. Union of India... that the inadvertent error in Form GST DRC 03 can be permitted to be corrected."

"The orders passed both by the proper officer (adjudicating authority) as also by the appellate authority dated 27th December, 2023 and 21st March, 2025 respectively, cannot be sustained and the same are accordingly, set aside and the matter is remanded back to the proper officer for adjudication having regard to the observations made hereinabove."

Core principles established include:

• Voluntary reversal of wrongly availed ITC, even if marred by inadvertent errors in documentation, should be accepted and corrected rather than rejected on technical grounds.
• Wrongful availment of ITC without utilization and with voluntary reversal does not amount to tax evasion.
• Recovery notices issued on the basis of such wrongful availment reversed voluntarily and accepted should be quashed.
• Adjudicating and appellate authorities must consider substance over form and allow rectification of inadvertent errors in GST forms.

Final determinations:

• The orders under Section 73 and Section 107 passed against the petitioners were set aside.
• The recovery notice under Section 79 was quashed.
• The matter was remanded to the proper officer for fresh adjudication in accordance with the Court's observations, allowing correction of inadvertent errors in reversal forms.