[Breaking] GSTR-1 vs GSTR-3B Mismatch: GSTAT Principal Bench Quashes FAA’s S.74 to S.73 Conversion [Read Order]

In the first judgment of the GST Appellate Tribunal ( GSTAT ), Principal Bench, has held that where differences between GSTR-1 and GSTR-3B arise due to credit notes, advances, and timing adjustments duly recorded in books, the assessee must be given an opportunity to amend returns.

In the matter of M/s Sterling & Wilson Pvt. Ltd. vs Commissioner, Odisha, the bench of S.K. Mishra, President held that the First Appellate Authority (FAA) cannot itself convert proceedings from Section 74 to Section 73 of GST Act, 2017 and determine liability. The redetermination of tax must be done only by the Proper Officer under Section 75(2).

The appellant is an EPC services company registered under GST, faced a demand for FY 2018-19 on the ground that output tax liability declared in GSTR-1 exceeded the tax paid through GSTR-3B by about ₹27 lakh.

The department treated the difference as short payment of tax and issued proceedings under Section 74 alleging suppression. A demand of tax, interest, and equal penalty was raised.

In the first appeal, the Appellate Authority accepted that there was no fraud or suppression intent, yet upheld the tax and interest and converted the case from Section 74 to Section 73. It restricts the penalty to 10% under Section 73(9).

The assessee challenged the matter before the GSTAT.

According to the assessee, the mismatch was purely due to timing differences, credit notes, debit notes, and advance adjustments relating to different tax periods, which could not be properly amended in GSTR-1 due to system limitations prevalent in the early GST years.

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It submitted reconciliation statements linking the differences to customer-wise credit notes, advance tax adjustments, and prior-period corrections, all duly recorded in books and reflected in GSTR-3B.

It was contended that there was no revenue loss and no intent to evade tax, and therefore demand based solely on return mismatch without proper reconciliation verification was unsustainable.

The Revenue, however, opposed the appeal contending that the returns are self-assessed declarations and mismatches must be corrected strictly as per the GST Act.

It argued that credit notes were issued beyond the timelines under Section 34(2), amendments were not carried out in GSTR-1, and reconciliation was not properly reflected in GSTR-9 and GSTR-9C.

It also asserted that the assessee failed to prove reversal of ITC by recipients wherever credit notes were claimed, thereby justifying confirmation of demand and interest.

The GST appellate tribunal rejected the Revenue’s objection that factual re-appreciation was barred.

The Tribunal noted that the First Appellate Authority itself had found that there was no fraud, wilful misstatement, or suppression, and that the transactions were supported by debit and credit notes and properly recorded in the books of account.

Also, the bench noted that, on the legal issue of conversion from Section 74 to Section 73, as per Section 75(2) and CBIC Circular instructions, once fraud allegations fail, re-determination under Section 73 must be done by the Proper Officer not by the Appellate Authority.

Therefore, the First Appellate Authority’s act of directly converting the case to Section 73 and confirming demand and reduced penalty was held unsustainable.

The bench said that “CGST / SGST Act is relatively new Act and professionals may not be thorough in the filing returns at the relevant period, together with fact that, at that particular time most of returns were being filed manually and the technique of auto-population and full online filling was not operational to fullest extent as it is now. There were chances of human error. In order to obviate any such human error, the matter should be re-considered by the learned Proper Officer.”

Accordingly, the principal bench set aside the orders to the extent they treated the case under Section 73 and confirmed demand. It also upheld the finding that Section 74 was not attracted.

The matter was remanded back to the Proper Officer for fresh consideration under Section 73 with granting assessee to file amendment applications and reconciliation materials within one month.

The department was also instructed to decide the matter after proper hearing and considering genuineness of debit /credit notes.

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