Madras High Court Sets Aside GST Order for Breach of Natural Justice on ITC and Tax Payment Issues

The Madras High Court has set aside an order passed against Hourglass Design Pvt. Ltd. by the Assistant Commissioner (ST), holding that the adjudication on excess input tax credit (ITC) claim and short payment of tax breached principles of natural justice. The Court found that the impugned order travelled beyond the scope of the show cause notice and failed to consider the taxpayer’s explanations and remittances, necessitating a remand for fresh consideration.

Background and Core Issues

The writ petition challenged an order dated 20 December 2025, which confirmed tax demands against Hourglass Design Pvt. Ltd. on two main grounds: alleged excess claim of ITC and short payment of tax on taxable supplies. The petitioner argued that the show cause notice only raised the issue of a mismatch between the category-wise ITC break-up in table 6 of GSTR 9 and the ITC availed, with specific differences cited for SGST, CGST, and IGST. The petitioner had responded to this notice, but the final order confirmed the tax proposal on a different basis, comparing ITC available in GSTR 2A with GSTR 3B returns, and using figures not previously communicated.

Findings on Input Tax Credit Issue

The Court observed that the show cause notice compared the petitioner’s GSTR 3B returns with the annual returns in GSTR 9, while the impugned order relied on a comparison between auto-populated GSTR 2A and GSTR 3B. The figures in the final order also differed from those in the petitioner’s reply. The Court held that since the petitioner was not given an opportunity to respond to this new basis for confirming the demand, the order violated principles of natural justice and required reconsideration.

Short Payment of Tax and Section 77 of CGST Act

On the issue of short payment of tax, the petitioner contended that the entire tax liability had been discharged, but the remittance was inadvertently made under the IGST head instead of CGST and SGST. The respondent argued that a refund application was necessary. The Court referred to its earlier decision in SYA Homes v. Assistant Commissioner (ST), holding that Section 77 of the CGST Act applies only where IGST is paid under the mistaken belief of an interstate supply. In this case, the petitioner had not made such a mistake, so Section 77 was inapplicable. The Court concluded that this issue also warranted reconsideration.

Directions and Relief Granted

The High Court set aside the impugned order as regards both the excess ITC claim and the short payment of tax. The matter was remanded to the first respondent for fresh adjudication. The petitioner was directed to file an application requesting that the sum inadvertently remitted under the IGST head be appropriated towards CGST and SGST liabilities. If required, a refund application may be submitted. The respondent was directed to issue a fresh order on the remanded issues within three months of receiving the application, after providing a reasonable opportunity to the petitioner.

Additionally, the Court ordered that any attachment of the petitioner’s bank account in relation to the impugned order be lifted. The writ petition and connected miscellaneous petitions were disposed of, with no order as to costs.

Legal Takeaway

This decision underscores the necessity for tax authorities to confine adjudication to the grounds set out in the show cause notice and to provide taxpayers a fair opportunity to respond to any new basis for demand. It also clarifies the limited applicability of Section 77 of the CGST Act regarding mistaken IGST payments, reinforcing that procedural fairness is essential in GST adjudication.