GST Refund Cannot Be Denied Merely Due To Provisional ITC Reversal: GSTAT Lucknow

On 22 October, the Lucknow Bench of the Goods and Services Tax Appellate Tribunal (GSTAT) held that a provisional reversal of input tax credit (ITC) and a pending investigation into an alleged stock shortage cannot, by themselves, establish a tax liability or justify rejection of a GST refund claim.

A Bench comprising Judicial Member Santosh Kumar Srivastava and Technical Member Arvind Kumar dismissed the tax department's appeal against the order allowing B.L. Agro Industries Limited a refund of Rs. 14.35 crore, holding that the department had not established that the reversed amount represented a self-assessed tax liability. It said:

“...an alleged stock discrepancy reported by another department cannot, without the requisite examination under the GST law, be treated as conclusive proof of an equivalent GST liability.”

B.L. Agro Industries, a manufacturer and supplier of edible oils and other products, had provisionally reversed ITC of Rs. 14.35 crore in its August 2018 GST return following allegations of a stock shortage reported during an Income Tax Department search in October 2018. The company maintained that the reversal was a precautionary measure intended to safeguard government revenue while the allegations were examined.

Subsequently, the company sought a refund of the reversed amount. The department rejected the claim, arguing that the reversal amounted to an acknowledgement of tax liability and that subsequent adjudication proceedings had confirmed the alleged stock shortage.

The appellate authority set aside the rejection, finding that the department had not established the reversed amount as a self-assessed tax liability and that the pending investigation did not, by itself, justify withholding the refund.

Before the GSTAT, the department argued that the company had disclosed the reversal in its GST return and that the alleged stock shortage supported the demand. It also relied on a subsequent adjudication order confirming a GST demand of approximately Rs. 14.36 crore.

The Tribunal noted that the company had consistently maintained that the reversal was provisional. A letter dated 8 October 2018, submitted to the department, supported its position that the company had reversed the amount in response to the allegations without admitting any tax liability.

It observed that disclosing an ITC reversal in a GST return does not automatically establish an equivalent self-assessed tax liability. The department must examine the circumstances and supporting records before treating a provisional reversal as a conclusive admission of tax payable.

Further, the Bench held that the subsequent demand order arose from separate adjudication proceedings and could not retrospectively determine the legality of the earlier refund rejection. It also distinguished the disputed refund from a separate ITC dispute involving Rs. 33.07 lakh, noting that the two matters arose from different transactions and required independent examination.

It clarified that the refund remained subject to verification of the applicable requirements under Section 54 of the Central Goods and Services Tax (CGST) Act, 2017. However, the department could not reject the claim merely because the amount had been reversed provisionally or an investigation into the alleged stock shortage remained pending. It observed:

“An investigation cannot, merely by remaining pending, convert a provisional reversal into an established liability or authorise indefinite retention of an amount without an adequate legal basis.”

The Tribunal added that “where, the authority rejecting the claim has not established that the reversal represented an amount legally payable as tax, it cannot sustain rejection solely on the basis that the reversal was made voluntarily or that an investigation remained pending.”

Accordingly, the GSTAT dismissed the department's appeal and upheld the order allowing the refund, subject to compliance with the statutory requirements.

For Appellant: Anupam Kumar and Nidhi Sharma, Superintendents, CGST

For Respondent: Kapil Vaish, Chartered Accountant