Anant Ram Vs Shyam Lal Shri Narain (GSTAT Lucknow)
Summary: The Goods and Services Tax Appellate Tribunal, Lucknow, partly allowed the Revenue Department’s appeal against M/s Shyam Lal Shri Narain for FY 2019-20. The adjudicating authority had originally confirmed a demand of ₹97,44,759 involving proportionate input tax credit reversal on taxable and exempt supplies and discrepancies between GSTR-3B and GSTR-2A. The First Appellate Authority reduced the demand to ₹1,78,515 after considering the taxpayer’s records, including separate accounts for taxable goods and exempt papad supplies.
The Revenue challenged the deletion of ₹47,43,843.14 relating to common ITC reversal under Section 17(2) read with Rules 42 and 43. The Tribunal found that the First Appellate Authority had not recorded the actual taxable and exempt turnover figures, quantified the common ITC or adequately verified the taxpayer’s claim that separate accounts eliminated the need for proportionate reversal. Consequently, it considered the appellate order insufficiently reasoned on this issue and directed fresh adjudication.
On the GSTR-2A mismatch, the Tribunal upheld relief of ₹74,325 supported by supplier clarification, invoices and banking records, referring to CBIC Circular No. 183/15/2022-GST. It also rejected the Department’s objection concerning ₹59,867.50 of ITC relating to Savorit Limited because that credit had already been disallowed. The Tribunal retained the demand of ₹1,78,515 and remanded only the Rule 42 reversal issue to the First Appellate Authority. The appeal was thus partly allowed, without a final determination of the remanded ITC demand.
FULL TEXT OF THE ORDER OF GSTAT LUCKNOW
The present appeal has been preferred by the Revenue Department under Section 112 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) and the Uttar Pradesh Goods and Services Tax Act, 2017 (“UPGST Act”). The Department challenges the final order dated 18.12.2024 passed by the First Appellate Authority, which extended substantial relief to the M/S SHYAM LAL SHRI NARAIN (hereinafter referred to as Respondent) by setting aside demand raised by the Adjudicating Officer vide order dated 30.08.2024.
1. BRIEF FACTS OF THE CASE
1.1. M/S SHYAM LAL SHRI NARAIN (GSTIN: 09ACDPG9868R1ZJ) registered as a proprietorship firm under GST Act 2017 having PPOB at 51/50, NAYA GANJ, KANPUR, Kanpur Nagar, Uttar Pradesh, 208001. The firm is a retailer and wholesaler, the TP trades in both taxable items and specific tax-exempt food products, notably “Papad”. The dispute belongs to the assessment period of the Financial Year 2019–20 (from 01/04/2019 to 31/03/2020).
1.2. The Proper Officer scrutinized the taxpayer’s monthly filed returns in Form GSTR-3B against the auto-populated data entries reflected in Form GSTR-2A. The systemic match uncovered a positive variance of ₹1,27,420.80/-, where the total input tax credit (ITC) claimed via GSTR-3B stood at ₹1,33,78,032.84/-, while as per the GSTR-2A ITC availability of ₹1,32,50,612.04/-.
1.3. Simultaneously, the Proper Officer reviewed the Respondent annual parameters filed under Form GSTR-9. The officer noted that outward supply amounting to ₹6,76,02,452.65/- were declared under the category of tax-exempted or Nil-Rated goods. Based on this value of exempt turnover, the officer presumed that the firm was running common structural procurement networks and, therefore, had to proportionately reverse its Input Tax Credit under Section 17(2) read with Rules 42 and 43 of the CGST/UPGST Rules, 2017.
1.4. A discrepancy noticed in Form GST ASMT-10 was issued under Section 61. Due to the non-appearance of counsel during the initial timelines, a formal Show Cause Notice (SCN) in Form GST DRC-01 was subsequently issued on 27-05-2024. The Adjudicating Officer proceeded to confirm the demand proposed in the SCN, concluding that the entire variance was an unlawful enrichment of tax benefits.
1.5. The Deputy Commissioner of Commercial Tax, Sector-08, Kanpur, acting as the Proper Officer, passed an order under Section 73(9). The OIO confirmed a total demand of ₹97,44,759/-.
1.6. Aggrieved by Order in Original, the Respondent preferred a statutory appeal before the First Appellate Authority. During the appellate proceedings, the Respondent presented structural books of accounts, direct procurement tax invoices, distinct ledger records of sales, and audited balancing figures.
1.7. Upon conducting a detailed verification, the Learned Additional Commissioner Grade-II (Appeal)-II, State Tax, Kanpur, passed an Order-in-Appeal on 18.12.2024. The First Appellate Authority dropped the Rule 42/43 common credit demand entirely. It further analyzed the GSTR-2A mismatch using the statutory reliefs granted under CBIC Circular No. 183/15/2022-GST. Ultimately, the authority scaled down the total confirmed tax liability to a consolidated sum of ₹1,78,515.00/-.
1.8. The Revenue Department has now filed this present appeal seeking to set aside the relief granted by the OIA and restore the OIO on the following specific legal arguments.
2. GROUND OF APPEAL BY THE DEPARTMENT
2.1. The Department contends that the First Appellate Authority erred in law by completely wiping out the tax demands when the Respondent had systematically failed to submit a thoroughly updated, continuous GSTR-2A transactional ledger directly to the original field-level proper officer during the initial assessment.
2.2. The Revenue strongly objects to the deletion of the mismatch demand regarding procurements from third-party vendors. Specifically, the Department points out an ITC component of ₹59,867.50 linked to purchase invoices issued by M/s SAVORIT LIMITED (GSTIN: 33AAACS9903R1ZU). The Department argues that this ITC was entirely missing from the auto-populated GSTR-2A stream and that the transaction certificate provided by the vendor did not properly reconcile with the supplier’s declared GSTR-9 tax filings, showing an IGST liability of only ₹18,631.00. The Revenue argues this makes the entire input tax credit look unverified and fake.
2.3. The Department submits that under the strict regime of Section 17(2), read with Rules 42 and 43 of the CGST/UPGST Rules, any registered individual reporting an exempt business turn of over ₹6.76 Crores must face a mechanical formulaic proportional reversal of their input credit pool. The Department claims that the First Appellate Authority had no authority to accept manual books of accounts to fully bypass this formula when no dynamic demarcation criteria were digitally verified by the field formation at the inception of the tax year.
3. SUBMISSION OF THE TAXPAYER;
3.1. The learned counsel representing the Respondent strongly resisted the Department’s appeal and presented the following submissions in support of their cross-objections:
3.2. The Respondent states that it maintains separate and verified purchase ledgers, dedicated tax invoices, distinct stock registers, and exclusive financial ledger accounts for its taxable Kirana/Spices business and its exempt Papad operations. It is further submitted that not a single rupee of Input Tax Credit was ever claimed, declared, or utilized against the purchases, logistics, or preservation of the exempt goods line. Because the tracking of inputs remains completely isolated, the statutory conditions for invoking common credit adjustments are completely absent.
3.3. The Respondent points out that out of the total mismatch volume, a key discrepancy of ₹74,325.00 arose because a key vendor, M/s Super Food Products, accidentally mapped the valid transactions onto a wrong client GSTIN (09AGVPG3518Q1ZK) in their regular returns. The TP fulfilled all legal requirements by obtaining a formal business clarification certificate from the supplier, matching the physical tax invoices, and producing bank statements that proved direct, traceable payments through official banking channels. This directly satisfied the verification criteria outlined in Circular No. 183/15/2022-GST, which the First Appellate Authority correctly recognized.
3.4. The Respondent highlights a major logical flaw in the Department’s appeal regarding the ₹59,867.50 credit from M/s Savorit Limited. The First Appellate Authority had already ruled against the Respondent on this specific point due to the lack of an updated, matching certificate during the appeal stage, and this amount was already included in the sustained demand of ₹1,78,515/-. Since this issue was already decided in the Department’s favour, the Revenue cannot claim to be an aggrieved party on this point. The appeal on this ground is entirely pointless and infructuous.
4. DISCUSSION AND FINDINGS OF THE TRIBUNAL
4.1. We have heard both sides, reviewed the case file, and examined the financial records and the provisions of the law. Our detailed findings on each issue are set out below:
4.2. The core of the dispute under Section 17(2) hinges on the statutory mandate that a registered person making both taxable and exempt supplies must restrict their input tax credit to the portion attributable to taxable supplies. The mathematical formula prescribed under Rule 42 (for inputs/input services) and Rule 43 (for capital goods) is a strict statutory framework designed to prevent leakage of revenue through common inputs. Rules 42 and 43. Section 17(2) of the Act states;
“Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
The keyword in this provision is “used… partly”, which points to the existence of a shared or common pool of inputs that feed into both taxable and exempt outputs.
4.3. We find that the statutory formula under Rule 42 requires the calculation of exempt credit via the ratio of Exempt Turnover to Total Turnover. The First Appellate Authority dropped the massive demand of ₹47,43,843.14/- without bringing onto the face of the order the actual recorded values of Exempted Sales and Taxable Sales for the disputed period.
4.4. We find that the authority accepted the Respondent’s argument that no common credit was mixed into the filings purely at face value, without conducting a verified physical audit. The order contains absolutely no analytical breakdown of the taxpayer’s operational realities. In any wholesale-cum-retail trading firm operating from a Principal Place of Business (PPOB), there are invariably shared overheads like commercial rent, common input goods (AC, furnitures), logistics. The First Appellate Authority failed to verify whether the ITC on these shared service channels was componentized or improperly absorbed into the taxable stream.
4.5. We find that the order fails to state whether a physical ledger verification or visual tracking of separate stock registers was executed to prove absolute isolation between the Kirana/Spices business and the Papad operations. The First Appellate Authority failed to record the essential figures of exempted sales, taxable sales, and common credit details under Rule 42, A demand of such magnitude has been wiped out based on general assertions without recording clear numbers, and calculations.
4.6. In view of the above, we are of the opinion that the order passed by the Learned First Appellate Authority is non-speaking and unquantified to the extent of portion dropping the demand under Rule 42.
4.7. We have carefully examined the reconciliation of Input Tax Credit (ITC) between GSTR-3B and GSTR-2A for the disputed period, along with the detailed findings of the First Appellate Authority. The original gross mismatch stands at ₹1,27,420.80.
4.8. We find that the Respondent successfully fulfilled all the statutory verification requirements under CBIC Circular No. 183/15/2022-GST for an ITC component totalling ₹74,325.00 (CGST: ₹37,162.50; SGST: ₹37,162.50). The Respondent produced valid tax invoices, banking logs proving actual financial consideration, and a formal certificate from the supplier confirming that the tax was fully paid to the Government but inadvertently mapped to an incorrect GSTIN. Having satisfied the core mandates of Section 16(2)(c) of the Act, the First Appellate Authority correctly extended the benefit of the curative circular. The Revenue Department cannot validly challenge a relaxation mechanism officially mandated by its own Board.
4.9. The Revenue Department’s objection regarding the IGST component of ₹59,867.50 is without merit. A review of the impugned Order-in-Appeal reveals that this specific credit was already disallowed and decided against the Respondent due to the non-production of a reconciled transaction validation certificate.
4.10. In view of the detailed findings recorded hereinabove, the portion of the impugned Order-in-Appeal dropping the demand under Section 17(2) read with Rule 42 is liable to be set aside and remanded back, whereas the findings regarding the GSTR-3B vs. GSTR-2A mismatch are upheld.
ORDER
In view of the above, the final Order-in-Appeal dated 18.12.2024 is MODIFIED. The findings sustaining the liability of ₹1,78,515/- regarding the GSTR-3B vs. GSTR-2A mismatch are UPHELD, whereas the portion dropping the Rule 42 ITC reversal demand is SET ASIDE. The matter is hereby REMANDED BACK on the Rule 42 reversal point to the First Appellate Authority for de novo adjudication as findings recorded hereinabove.
