Tax liability under Section 79 of CGST At 2017 sustains where services were rendered but payment was not received: Madras High Court
Summary: The Madras High Court in Sudhan VFX vs. Superintendent, Range-IV, Valasaravakkam Division, Chennai set aside a final demand and recovery intimation issued under Section 79 of the TNGST Act against a taxpayer who had originally reported invoices in GSTR-1 but later cancelled them after the recipient failed to honour the contract. Since the invoices were not reported in GSTR-3B, a mismatch triggered an intimation under Rule 88C, to which the Petitioner responded. However, without considering the reply, the department initiated recovery proceedings through Form GST DRC-01D. The Court observed that the taxpayer’s reply was incomplete and that unilateral post-facto cancellation of invoices was insufficient. It clarified that if services were actually rendered, tax liability arises even if payment is not received, and mere cancellation does not extinguish liability. The matter was remanded to the adjudicating authority to reconsider the issue, with directions for the Petitioner to furnish proper books-based evidence to substantiate its claims.
Facts:
M/s. Sudhan VFX (“the Petitioner”) had raised certain invoices for the recipient. However, the recipient did not honour the contract, and subsequently the Petitioner cancelled those invoices. Initially, the petitioner reported those invoices in Form GSTR-1, however, they were not reflected in Form GSTR-3B as there was no concluded contract with the supplier and therefore the Petitioner was not liable to pay tax, which resulted in a mismatch between the two returns.
Thereafter, the Petitioner received an intimation notice for differences in returns along with Form GST DRC-01B dated September 29, 2023, by the adjudicating authority under Rule 88C of the Tamil Nadu Goods and Services Tax Rules, 2017 (“the TNGST Rules”), which was also replied by the Petitioner on the same date in Part-B (“the Reply”). However, without taking note of the same, the adjudicating authority started the recovery proceedings and issued Form GST DRC-01D under Section 79 of the TNGST Act.
Aggrieved by the same, the petitioner filed this petition.
Issues:
Whether tax liability under Section 79 sustains even in cases where services were rendered but payment was not received?
Held:
The Hon’ble Madras High Court in W.P. No. 41761 of 2025 held as under:
- Observed that, the reply seems to indicate that the Petitioner has cancelled the invoice post facto.
- Noted that, in case the Petitioner has provided service but has not received payment, the Petitioner will still be liable to pay tax in terms of the provisions of Section 79 of the TNGST Act.
- Held that, the reply filed by the petitioner is incomplete. The Petitioner ought to have given a proper reply by substantiating his arguments with the Annual Books of Account receivable, as mere cancellation of the invoices unilaterally at a later point in time is of no avail.
- Remanded back the case to the adjudicating authorities to pass a fresh order within a period of thirty days, and the Petitioner shall give a proper reply with proper evidentiary materials to substantiate his case.
Our Comments:
Section 79 of the TNGST Act:
79(c) (i) the proper officer may, by a notice in writing, require any other person from whom money is due or may become due to such person or who holds or may subsequently hold money for or on account of such person, to pay to the Government either forthwith upon the money becoming due or being held, or within the time specified in the notice not being before the money becomes due or is held, so much of the money as is sufficient to pay the amount due from such person or the whole of the money when it is equal to or less than that amount;
(ii) every person to whom the notice is issued under sub-clause (i) shall be bound to comply with such notice, and in particular, where any such notice is issued to a post office, banking company or an insurer, it shall not be necessary to produce any pass book, deposit receipt, policy or any other document for the purpose of any entry, endorsement or the like being made before payment is made, notwithstanding any rule, practice or requirement to the contrary;
(iii) in case the person to whom a notice under sub-clause (i) has been issued, fails to make the payment in pursuance thereof to the Government, he shall be deemed to be a defaulter in respect of the amount specified in the notice and all the consequences of this Act or the rules made thereunder shall follow;
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