Background of the Case
The petitioner, a partnership firm engaged in the manufacture and sale of cotton seed oil (a taxable product under GST), had also been generating cotton oil cake as a by-product, which is exempt from GST.
For FY 2017–18, the petitioner availed full Input Tax Credit (ITC) but, upon legal advice, voluntarily reversed the proportionate ITC in March 2020, as per Section 17(2) of the GST Act.
Despite this, the department issued a show-cause notice dated 28.09.2023 under Section 73, alleging non-reversal of ITC and proposing recovery. This was followed by an ex parte adjudication order dated 21.12.2023 in Form GST DRC-07, confirming a demand of ?58,08,042.
Key Legal and Procedural Issues Raised
The petitioner approached the High Court under Article 226 seeking:
Quashing of the SCN and Order-in-Original as being arbitrary and without jurisdiction.
Challenge to Section 107(4) of the GST Act, which disallows condonation of delay in appeal filing beyond the prescribed limit.
Relief against coercive recovery actions, including bank account and Demat account attachment.
Consideration of the reversal already made in March 2020, well before the deadline under the amended Section 16(5).
Department's Argument
The tax department contended:
The petitioner failed to file a reply to the SCN.
The reversal was not made within the timeline under Section 39(9), i.e., before 30th November following the end of the financial year.
The order uploaded on the GST portal is valid service as per Section 169(d).
Thus, the petitioner was liable for full reversal along with interest and penalty.
High Court’s Observations and Verdict
The Court made several critical findings:
Reversal Was Already Done: It was undisputed that the ITC was reversed by the petitioner prior to issuance of the SCN.
Incorrect Framing of SCN: Instead of demanding reversal again, the department should have issued a notice only for interest or penalty for delay in reversal under Section 50, not under Section 73 for wrongful availment.
Breach of Natural Justice: The Order-in-Original was passed without personal hearing under Section 75(4), and no effective service of order was proved.
Procedural Misapplication: The authority failed to verify the GSTN portal records to confirm reversal before proceeding.
Potential Double Taxation: Re-asking the petitioner to reverse ITC already reversed would amount to double taxation.
Final Directions
The impugned SCN and adjudication order were quashed.
Matter was remanded for de novo adjudication after granting a proper hearing.
Authorities were asked to consider the amount already deposited and proceed accordingly.
Coercive actions like bank account attachments were lifted upon partial payment (?5 lakh) by the petitioner.
GST Case Law Ajay Industries Versus Union of India
Citation-2025 TAXONATION 1030 (GUJARAT)
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