GST ITC Reversal Unsustainable after GST Registration Restoration: Andhra Pradesh HC Quashes Reversal of Closing ITC [Read Order]

The Andhra Pradesh High Court has ruled that reversal of input tax credit (ITC) cannot be sustained once the cancellation of Goods and Services Tax (GST) registration itself has been set aside, and ruled that any demand raised solely on the basis of such cancellation is unlawful.

The petitioner, M/s. Hithaishi Infra Machine, a registered dealer under the Central Goods and Services Tax Act, 2017 (CGST Act) and the Andhra Pradesh Goods and Services Tax Act, 2017, (APGST Act) was issued a show cause notice proposing cancellation of its GST registration on the ground that it was not conducting business at its principal place of business as declared in the registration certificate.

As no reply was submitted to the notice, the registration of the petitioner was cancelled retrospectively. Consequent to such cancellation, a further show cause notice was issued directing the petitioner to reverse the closing balance of ITC amounting to ₹22,68,580 under Section 29(5) of the CGST Act, 2017.

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Thereafter, the Assistant Commissioner passed an assessment order in Form GST DRC-07 confirming the demand for reversal of ITC solely on the premise that the GST registration of the petitioner stood cancelled. Aggrieved by the assessment order, the petitioner approached the High Court by way of a writ petition.

Anil Kumar Bezawada for the petitioner contended that the failure to respond to the show cause notice proposing cancellation of registration occurred due to the sudden departure of its accountant and lack of access to portal communications following cancellation. It was pointed out that the assessment order was vitiated by procedural irregularities, including absence of proper signature and incorrect Document Identification Number.

Subsequently, submitted that the cancellation of GST registration itself had already been challenged in a separate writ petition and that the High Court, by an earlier order, had restored the registration. In view of such restoration, the very foundation for invoking Section 29(5) of the CGST Act, 2017 and demanding reversal of ITC no longer survived.

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The authorities through Santhi Chandr argued that once the GST registration was cancelled, the petitioner was statutorily required to reverse the unutilised ITC lying in its electronic credit ledger. Subsequently, since the petitioner has neither filed Form GSTR-10 nor obtained a fresh registration to facilitate transfer of credit, the demand raised under Section 29(5) of the CGST Act, 2017 was justified.

The Division Bench of Justice R. Raghunandan Rao and Justice T.C.D. Sekhar observed that the impugned demand for reversal of ITC was entirely predicated on the cancellation of the petitioner’s GST registration. The Court noted that the cancellation order had already been set aside in earlier proceedings and the registration stood restored.

In such circumstances, the Bench ruled that the condition precedent for invoking Section 29(5) of the CGST Act, 2017 ceased to exist. Therefore, once the registration itself was restored, the question of reversing the closing balance of ITC did not arise. Accordingly, the assessment order demanding reversal of ₹22.68 lakh was set aside.

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