Facts of the Case

M/s. Shree Mallikarjuna Enterprises challenged an order dated 04.10.2023 passed under Section 73 of the Karnataka Goods and Services Tax Act, 2017, on the allegation that the petitioner had claimed excess Input Tax Credit (ITC). The petitioner had been served with an intimation in Form GST DRC-01A on 10.03.2023 and a Show Cause Notice in Form GST DRC-01 on 11.07.2023, but had failed to respond to both proceedings.

Thereafter, the petitioner applied for rectification of the order. The rectification request was rejected through an endorsement dated 20.03.2026 on the ground that the request did not satisfy the conditions necessary for exercise of rectification jurisdiction. The petitioner therefore approached the Karnataka High Court seeking quashing of the adjudication order dated 04.10.2023, quashing of the endorsement rejecting rectification, and dropping of consequential proceedings including recovery proceedings.

The petitioner’s central defence was that, during the initial phase of GST implementation, an inadvertent error occurred in December 2017, whereby ITC amounting to ₹3,39,066 was mistakenly availed under the IGST column. According to the petitioner, the entire credit was voluntarily reversed in July 2019, without any prompting from the Department. The petitioner further claimed that the credit had neither been utilised for discharge of output tax liability nor claimed as refund and had merely remained in the electronic credit ledger until complete reversal.

Issues Involved

The principal issues before the Karnataka High Court were:

  1. Whether the order dated 04.10.2023 passed under Section 73 of the KGST Act concerning alleged excess ITC should be interfered with when the petitioner claimed that the credit had been inadvertently availed under the IGST column and subsequently voluntarily reversed.
  2. Whether the petitioner should be granted an effective opportunity to place a detailed response and supporting documents before the adjudicating authority in terms of the opportunity contemplated under Section 75(4) of the KGST Act.
  3. Whether the petitioner’s claim that the alleged excess ITC was neither utilised nor refunded and was voluntarily reversed required factual verification by the proper authority.
  4. Whether the rejection of the rectification request could prevent reconsideration of the original adjudication order in the particular circumstances of the case.
  5. Whether the petitioner could seek revocation of the suspension of its GST registration if such suspension was attributable only to the impugned adjudication order.

Petitioner’s Arguments

The petitioner contended that it was new to the GST compliance environment during the initial implementation phase and that an inadvertent error had occurred in December 2017, resulting in ITC of ₹3,39,066 being mistakenly availed under the IGST column.

The petitioner submitted that:

  • the entire disputed credit was voluntarily reversed in July 2019;
  • the reversal was made without any prompting from the Department;
  • the ITC was never utilised for discharge of output tax liability;
  • no refund of such credit was ever claimed;
  • the credit merely remained in the electronic credit ledger until its complete reversal;
  • the alleged excess availment was procedural and clerical in nature;
  • the error occurred during the nascent stage of GST implementation;
  • there was no revenue implication or mala fide intention; and
  • in view of voluntary reversal and absence of utilisation, initiation of proceedings and the consequential order were unwarranted and unsustainable.

The petitioner further argued that, had an opportunity been extended as contemplated under Section 75(4) of the KGST Act, it could have demonstrated the inadvertent error in availing ITC under the IGST column and the subsequent voluntary reversal of the entire credit. It was also submitted that the petitioner’s GST registration stood suspended because of the pending controversy.

Respondents’ Arguments

The learned Additional Government Advocate submitted that the adjudicating authority had no occasion to verify whether there was a bona fide error that had been voluntarily rectified because the petitioner had failed to respond either to the intimation in Form GST DRC-01A or to the Show Cause Notice in Form GST DRC-01.

At the same time, the respondent’s counsel submitted that the question whether the error was bona fide and voluntarily rectified could be verified if appropriate orders were passed by the High Court.

Regarding suspension of GST registration, the respondents contended that such suspension could have occurred for any reason and not necessarily because of the impugned assessment/adjudication order. It was further pointed out that the petitioner had not categorically pleaded that the registration was suspended solely because of the impugned order.

Court’s Findings

The Karnataka High Court considered the circumstances of the case and the submissions advanced by both sides. The Court held that, notwithstanding the rejection of the rectification request, interference with the order dated 04.10.2023 was warranted and the proceedings should be restored to the second respondent.

The Court considered it appropriate to provide the petitioner an opportunity to file a detailed response consistent with the defence raised in the rectification proceedings. According to the Court, such reconsideration would enable proper adjudication on:

  • whether the ITC claim was inadvertent;
  • whether the credit had been voluntarily reversed; and
  • whether such course of action could permit the petitioner to avoid the liabilities imposed.

The Court therefore recognised the need for the adjudicating authority to examine the petitioner’s factual claim of inadvertent ITC availment and voluntary reversal, subject to the applicable statutory provisions.

Court Order

The Karnataka High Court allowed the writ petition in part and passed the following directions:

  • The order dated 04.10.2023 was quashed.
  • The endorsement dated 20.03.2026, whereby the rectification request had been rejected, was dissolved.
  • The proceedings were restored to the Assistant Commissioner of Commercial Taxes, being the second respondent.
  • The petitioner was granted an opportunity to file a detailed response along with all supporting documents by 06.07.2026.
  • The adjudicating authority was directed to consider the petitioner’s response in light of the claim of inadvertent error and voluntary reversal, subject to statutory provisions.
  • The petitioner was granted liberty to file an application before the second respondent seeking revocation of suspension of GST registration.
  • The second respondent could verify whether the suspension of GST registration was solely because of the impugned adjudication order.

Important Clarification

This judgment does not finally hold that every voluntary reversal of wrongly availed ITC automatically extinguishes tax, interest, penalty, or other statutory liability. The High Court restored the matter for factual and statutory examination of the petitioner’s specific claim that the ITC was inadvertently availed under the IGST column, remained unutilised, was never claimed as refund, and was voluntarily reversed. The adjudicating authority must consider those assertions subject to the statutory provisions.

A further important clarification is that the High Court did not directly order revocation of the GST registration suspension. Instead, it reserved liberty to the petitioner to apply for revocation, enabling the authority to verify whether the suspension was attributable only to the impugned adjudication order.

Sections Involved

Section 73 of the Karnataka Goods and Services Tax Act, 2017: The impugned order dated 04.10.2023 was passed under this provision in relation to the allegation of excess Input Tax Credit.

Section 75(4) of the Karnataka Goods and Services Tax Act, 2017: Relied upon in the context of the petitioner’s submission that an opportunity would have enabled it to demonstrate the inadvertent IGST-column error and voluntary reversal of the credit.

Article 226 of the Constitution of India: The writ petition was instituted before the Karnataka High Court seeking judicial review of the impugned adjudication order and the endorsement rejecting rectification.

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https://mytaxexpert.co.in/uploads/1783070427_474compressed.pdf 

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