GST Demand Not Sustainable if ITC Voluntarily Reversed Before Anti-Evasion Proceedings: Orissa HC Quashes DRC-07 Order [Read Order]

The Cuttack Bench of the Orissa High Court held that a Goods and Services Tax (GST) demand confirmed under Section 74 of the CGST Act, 2017 cannot survive where the input tax credit (ITC) alleged to have been wrongly availed was reversed by the assessee before initiation of anti-evasion proceedings. The Court accordingly quashed the impugned Order-in-Original and consequent summary order in Form GST DRC-07, in favour of the assessee.

The order was given by the Court while hearing petitions filed by M/s. Manoja Kumar Nayak, a proprietorship engaged in transportation and execution of works contract, along with a connected petition by M/s. Babamani Roadways & Borewells. Both petitioners challenged proceedings initiated by the Superintendent (Anti-Evasion), CGST and Central Excise, Rourkela Commissionerate.

As per the facts in the first petitioner’s case, they were issued a letter on July 12, 2024 calling upon the petitioner to reverse ITC of ₹4,39,970, alleging that their supplier M/s Auxesia Traders, Kolkata was a non-existent entity who issued fake invoices.

The petitioner replied on July 17, 2024 stating that the credit had already been reversed voluntarily through Form GSTR-3B for April 2023 and June 2024, and that the Electronic Credit Ledger carried a surplus balance over the disputed amount throughout.

The petitioner was issued a Summary Show Cause Notice and Demand Show Cause Notice on July 26, 2024 under Section 74 read with Section 50 of the CGST Act and Section 20 of the IGST Act for the period from August to December 2017. The Adjudicating Authority passed the Order-in-Original dated February 3, 2025, confirming tax, interest and penalty equal to the amount already reversed.

Since the matter involved questions against proceedings under Section 74 of the Act, and the payability of penalty and interest, the High Court took up the case for final hearing at the stage of Fresh Admission itself.

Senior Advocate Rudra Prasad Kar, Aditya Narayan Ray, Asit Kumar Dash and Abhishek Dash appeared for the petitioner and submitted that Section 74 requires fraud, wilful misstatement or suppression with intent to evade tax, none of which the Adjudicating Authority had independently established, with the complete action emanating solely from an Alert Notice from the DGGI, Kolkata Zonal Unit.

It was argued that since the disputed credit had been reversed and the Electronic Credit Ledger retained surplus balance throughout, no interest could arise under Section 50, and that levying penalty on an amount already reversed would leave the net tax effect at nil.

Sujan Kumar Roy Choudhury and Mukesh Agarwal appeared for the Revenue parties and contended that whether the reversal corresponded to the disputed credit was a factual question for the departmental authorities to examine.

The Division Bench of Chief Justice Harish Tandon and Justice Murahari Sri Raman found that the Adjudicating Authority had proceeded mechanically on the DGGI Alert Notice without independent application of mind or verification of the petitioner's complicity with the supplier's non-existence, observing that reliance on a third party's admission cannot substitute the requirements for strong and tangible material to raise demands under Section 74.

The Bench referenced CBIC Circular No.192/04/2023-GST dated July 17, 2023 and Rule 88B of the CGST Rules to hold that since the Electronic Credit Ledger never fell below the disputed credit amount, no interest under Section 50(3) was exigible. The Bench further held that demanding tax equivalent to credit already reversed, and then imposing equal penalty on it, amounted to double taxation as the net tax effect stood at nil.

Accordingly, the Orissa High Court quashed the Order-in-Original and the connected summary order in Form GST DRC-07, allowing both writ petitions.

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