GST ITC Reversal During Inspection Not Voluntary: Karnataka HC Allows GST Proceedings to be Revived Despite Setting Aside Closure [Read Order]

In a recent ruling, the Karnataka High Court held that reversal of Goods and Services Tax (GST) Input Tax Credit (ITC) made during inspection cannot be treated as voluntary in certain circumstances, while also allowing the tax authorities to revive proceedings despite setting aside the closure order.

The case arose from a writ appeal filed by the Revenue challenging the order of a Single Judge which had set aside the closure order passed under Section 74(6) of the Central Goods and Services Tax Act, 2017 and directed refund of tax, interest and penalty paid by Kum Internationals.

An inspection was conducted at the assessee’s premises on 03 June 2024 during which ineligible ITC was detected. The assessee reversed the ITC during the inspection and later paid interest and penalty on 10 June 2024. A letter was also filed under Section 74(5) seeking closure of proceedings, following which the Proper Officer passed a closure order on 27 August 2024.

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Subsequently, the assessee filed a writ petition arguing that the reversal of ITC and the payment of tax, interest and penalty were made under coercion and pressure during the inspection. The Single Judge accepted this contention and directed refund, while keeping the issue open for adjudication.

The revenue argued before the Division Bench that the assessee had voluntarily reversed the ITC and opted for closure under Section 74(5) and that mere allegations of coercion without proof cannot invalidate such action. They also argued that the assessee did not complain to higher authorities about any alleged coercion.

On the other hand, the assessee argued that the reversal was done during the course of inspection in the presence of officers and under pressure and that the payment was made only to avoid adverse action.

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The Division Bench comprising Justice S.G. Pandit and Justice K.V. Aravind observed that a mere allegation of coercion is not sufficient and must be supported by surrounding circumstances. It pointed out that the assessee had not lodged any complaint for a considerable period, which raises doubt about the claim of coercion.

At the same time, the court observed that the reversal of ITC during the inspection while officers were present, lends some support to the assessee’s claim that the action may not have been entirely voluntary.

The court explained that if a closure under Section 74(6) is set aside on the ground of involuntary payment, the proceedings must be restored to the stage before such closure, so that the Revenue is not deprived of its right to initiate adjudication under Section 73 or 74 of the GST Act.

The court modified the Single Judge's order and allowed the Revenue to proceed under the relevant provisions of the Act. It also directed that the period from 11 June 2024 till the date of judgment shall be excluded for limitation. The appeals were partly allowed.

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