GSTAT Ernakulam Allows Excess Output Tax Paid To Be Adjusted Against Ineligible ITC

The Goods and Services Tax Appellate Tribunal (GSTAT), Ernakulam Bench, has recently ruled that excess output tax paid by a taxpayer can be adjusted against ineligible Input Tax Credit (ITC).

It held that when the excess tax paid exceeds the ITC disallowed, there is no short payment of tax warranting proceedings under Section 73 of the CGST/KGST Act.

“Expecting the appellant to pay up the shortfall demanded and then file a claim for refund of the excess amount paid would be an exercise in futility. As such we find that when the excess of output tax paid is more than the input credit denied, there is no short payment of tax warranting invocation of proceedings under section 73 of the KGST / CGST Act,” the tribunal observed.

The division bench comprising Vice President Subramanya V. Rayaprol and Technical Member Ramamoorthi Sriram was hearing an appeal filed by Chennamkudiyil Timbers. The dispute arose from tax demands relating to its GST returns for 2017–18.

The taxpayer argued that it had paid ₹99,449.20 more in output tax than it owed, exceeding the disputed ITC of ₹62,626. The department opposed adjusting the excess payment against the ITC, arguing that the taxpayer had to follow the refund procedure under Section 54 of the CGST Act.

The tribunal relied on a Kerala High Court ruling to accept the taxpayer's argument. It also rejected the department's claim that the refund was subject to the test of unjust enrichment, holding that Section 54(8)(c) applied to the excess tax paid.

The tribunal also found an unsustainable separate demand relating to sales returns worth ₹3,55,206. The show-cause notice alleged that the taxpayer had claimed sales returns without supporting documents. However, the original adjudication order confirmed the demand because Pinnacle Trading Company had not declared the debit note in its GSTR-1 and GSTR-9.

The tribunal held that the department could not confirm the demand on a ground that had not been raised in the show-cause notice.

It also held that, for 2017–18, there was no mandatory requirement to declare credit and debit notes on the GST portal. The notes could not be rejected solely because they had not been uploaded, provided they were otherwise in order.

The tribunal criticised the first appellate authority for rejecting the taxpayer's detailed submissions in a single line. It held that the order was arbitrary, non-speaking and showed a lack of application of mind, in violation of the principles of natural justice.

The tribunal found that the notice demanding interest on delayed GST returns did not specify the default months, tax amount or period involved. It also noted that the demand rose from ₹1,13,017 in the notice to ₹1,54,314 in the original order, without explanation. Holding the notice vague and unfair, it allowed the appeal and set aside the appellate order.

For Appellant: Advocate Broono P.D. appeared for the appellant,

For Revenue: Anil Gopinath, Authorised Representative