Facts of the Case

Shyama Power India Ltd. (GSTIN 02AAHCS6024L1ZE), engaged in constructing transmission lines for hydro-electric projects, was audited under Section 65 of the HPGST/CGST Acts for 2017-18 and 2018-19. The audit alleged wrongful availment of Input Tax Credit of about Rs.1.11 crore from three suppliers. Despite submitting detailed replies and transporter affidavits, and despite the final Audit Report (Form ADT-02) confirming no short payment of tax, the petitioner reversed the disputed ITC 'under protest' on 31.03.2023 via Form DRC-03 to avoid continued departmental pressure. Shockingly, the Commissioner thereafter passed an order under Section 74 on 02.12.2023 levying interest of Rs.1,32,34,923/- and penalty of Rs.1,11,45,134/- by treating the protest payment as an admitted liability, without even determining the underlying tax demand — leaving the petitioner unable to appeal the basic demand through the portal.

Issues Involved

  1. Whether an amount reversed by a taxpayer 'under protest' can be treated by the adjudicating authority as an admission of liability to justify levying interest and penalty without independently determining or adjudicating the underlying tax demand.
  2. Whether Input Tax Credit can be reversed and penalised merely on suspicion, without an independent inquiry supported by evidence.

Petitioner's Arguments

  • The amount of Rs.1,11,45,134/- was reversed strictly 'under protest' while continuing to exercise legal remedies, and its necessary corollary is that liability was never admitted and the right to challenge remained intact.
  • The adjudicating authority erred grievously in treating the protest payment as an admitted liability and imposing interest and penalty without any independent determination of the tax demand itself.
  • The rectification application under Section 161 pointing out this defect was wrongly rejected on an unrelated technical ground (absence of mismatch between SCN and DRC-07) without addressing the substantive point raised.
  • ITC worth over a crore could not be reversed merely on suspicion arising from an audit memo without an independent investigation and corroborating evidence.

Respondent's Arguments

  • The Department contended that the ITC availed from the three named suppliers was fraudulent, based on the discrepancy notice issued under Rule 101(4) of the HP GST Rules, and that the reversal via DRC-03 justified confirming interest and penalty on that amount.
  • No formal reply on merits was filed by the respondents despite being directed to do so, and the officer who passed the order failed to satisfactorily explain her reasoning when personally called upon by the Court.

Court Order / Findings

  • The Court, having found the impugned order to be 'totally perverse' even prima facie, had summoned the concerned officer to explain her order, and she failed to satisfy the Court.
  • The Court relied on Black's Law Dictionary's definition of 'under protest' to hold that a payment made under protest is, by definition, made while disputing the liability and reserving the right to recover it later; it can never be treated as an admission of liability.
  • The Court held that the adjudicating authority completely erred in reversing ITC of over a crore merely on suspicion, without any independent inquiry or investigation coupled with corroborating evidence, and could not base its decision solely on the DRC-01 summary.
  • The Section 74 order dated 02.12.2023 was quashed, and the respondent was directed to issue a fresh DRC-07 confined to the disputed tax amount of Rs.1,11,45,134/- so as to enable the petitioner to properly agitate it in appeal, with liberty to raise all grounds afresh.

Important Clarification

  • A GST payment made expressly 'under protest' via Form DRC-03 can never be treated by the adjudicating authority as a voluntary admission of liability; doing so to justify interest and penalty without adjudicating the underlying demand is legally impermissible.
  • Reversal of Input Tax Credit on suspicion arising merely from an audit observation, without an independent inquiry backed by evidence, does not meet the threshold required under Section 74 to sustain a demand.

Sections Involved

  • Section 74, HPGST Act, 2017 — determination of tax not paid by reason of fraud, wilful misstatement or suppression, the basis of the impugned order.
  • Section 65, HPGST/CGST Act, 2017 — audit of registered persons by tax authorities, under which the underlying scrutiny was conducted.
  • Form GST DRC-03, CGST Rules, 2017 — voluntary payment form used by the petitioner to reverse the disputed ITC under protest.
  • Section 161, HPGST Act, 2017 — rectification of errors apparent on the face of the record, under which the petitioner's application was wrongly rejected.

Decision – In Favour of

The decision is in favour of the assessee (Shyama Power India Ltd.). The interest and penalty order was quashed, and the department directed to issue a fresh demand confined to the disputed tax so the petitioner could properly appeal.

Case Details

High Court of Himachal Pradesh, Shimla; CWP No. 6990 of 2025 (2025:HHC:19141); Coram: Hon'ble Mr. Justice Tarlok Singh Chauhan and Hon'ble Mr. Justice Sushil Kukreja; Order dated 19.06.2025.

Link to Download the Order

Click here to view/download the full order

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.