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Adjudication Quashed for Ignoring Explanation on Credit Note Adjustment; Revenue Neutrality Noted

Issue

Whether a GST adjudication order confirming a demand for Input Tax Credit (ITC) mismatch (GSTR-3B vs GSTR-2A) is sustainable if the Proper Officer fails to consider the petitioner’s specific explanation that the credit notes from suppliers were adjusted by increasing output tax liability instead of reversing ITC, resulting in no revenue loss.

Facts

The Mismatch: The petitioner, a Gujarat-based proprietorship trading in chemical fertilizers and cement, received a Show Cause Notice (SCN) based on a discrepancy between the ITC claimed in GSTR-3B and that reflected in GSTR-2A for the period 2020-21.
The Explanation: The petitioner filed a detailed reply explaining the discrepancy. They stated that when suppliers issued credit notes, instead of reducing their ITC claim in GSTR-3B (which is the standard practice), they had added the equivalent amount to their output tax liability.
- Logic: Reducing ITC and increasing output tax have the same mathematical effect on the net tax payable to the government. Therefore, there was no loss to the exchequer.
The Order: The Assessing Officer (AO) dropped a separate demand regarding blocked credit but confirmed the demand for the GSTR-3B vs 2A mismatch.
The Lapse: Crucially, the AO’s order was silent on the petitioner’s specific defense regarding the accounting adjustment of credit notes. The explanation was neither accepted nor rejected with reasons; it was simply ignored.
Appellate Failure: The statutory appeal filed by the petitioner was rejected on the ground of limitation (time-barred).

Decision

The Gujarat High Court ruled in favour of the assessee.
Violation of Natural Justice: The Court held that the “non-consideration” of a specific and vital explanation constitutes a breach of the principle of audi alteram partem (no one should be condemned unheard). A hearing is not a mere formality; it requires the authority to apply its mind to the submissions made.
Failure to Deal with Defense: By confirming the demand without addressing the argument that the tax was already paid via the output liability route, the AO failed to discharge their quasi-judicial function.
Remand: The Court quashed and set aside both the adjudication order and the appellate order. The matter was remanded to the Proper Officer for a de novo (fresh) decision.
Direction: The officer was directed to grant a personal hearing and pass a reasoned order specifically dealing with the petitioner’s explanation regarding the mode of adjustment of credit notes.

Key Takeaways

Accounting vs. Tax Evasion: GST law cares about the net tax paid. Whether a credit note adjustment is reported by reducing the “ITC availing” column or increasing the “Outward Tax Liability” column is a procedural nuance. If the net effect is that the government received its due, the demand should arguably not stand.
Speaking Orders are Mandatory: An adjudication order that ignores a primary defense raised by the taxpayer is legally unsustainable (“non-speaking order”) and liable to be quashed by High Courts.
Writ Remedy for Time-Barred Appeals: This judgment reiterates that High Courts can intervene under Article 226 even if the statutory appeal period has expired, provided there is a gross violation of natural justice (like ignoring a filed reply).
Alternative Adjustment: Taxpayers who have adjusted credit notes via output liability should ensure they have a clear reconciliation statement ready to prove “revenue neutrality” during assessments.

HIGH COURT OF GUJARAT

Anjani Seeds and Fertilizers Depo

State of Gujarat^*

BHARGAV D. KARIA and Pranav Trivedi, JJ.

R/SPECIAL CIVIL APPLICATION NO. 11080 of 2025

OCTOBER 16, 2025

Uchit N Sheth, Adv. for the Petitioner. Abhishek Jain, Assistant Government Pleader for the Respondent.

JUDGMENT

Pranav Trivedi, J. – Heard learned advocate Mr. Uchit N. Sheth for the petitioner and learned Assistant Government Pleader Mr. Abhishek Jain for the respondents.

2. Having regard to the controversy involved which is in a narrow compass, with the consent of learned advocates for the respective parties, the matter is taken up for hearing.

3. Rule returnable forthwith. Learned Assistant Government Pleader Mr. Abhishek Jain waives service of notice of rule on behalf of the respondent State.

4. By way of present writ petition, the petitioner has prayed to quash and set-aside the order dated 1.1.2025 passed by the adjudicating authority under the provisions of Gujarat Goods & Service Tax Act, 2017 (hereinafter referred to as ‘the Act’) as well as Appellate Order passed under Section 107 of the Act dated 18.6.2025.

5. The brief facts leading to filing of the present petition are as under:

5.1 The petitioner is a proprietorship concern and registered under the provisions of the Act, inter alia, is engaged in the business of trading of chemical fertilizer and cement. An intimation in Form GST DRC-01A was issued on 11.6.2024 proposing demand under Section 73 of the Act for the year under consideration i.e. 2020-2021. As the petitioner was not willing to pay the demand as proposed, a show-cause notice was issued in Form GST DRC-01 on 3.9.2024. The show-cause notice proposed demand on two grounds i.e. firstly, it was alleged there was difference between Form GSTR-3B and Form GSTR-2A and secondly the petitioner had claimed blocked credit under Section 17(5) of the Act.

5.2 It is the case of the petitioner that subsequent to the show-cause notice, detailed reply was given by the petitioner on 19.10.2024. Clarifications were made by the petitioner to the issues raised in the show-cause notice. It was pointed out that only because credit notes issued by the supplier of the petitioner were reported by the petitioner as output tax liability instead of reducing from column of input tax credit, demand was raised. However, without considering the submission made by the petitioner, the adjudicating authority passed the impugned adjudication order on 1.1.2025. However, the issue of blocked credit under Section 17(5) of the Act was dropped by the adjudicating authority and as far as the issue of difference between input tax credit as per Form GSTR-3B and Form GSTR-2A was concerned, the demand was confirmed by the impugned order.

5.3 It is the case of the petitioner that subsequent to the passing of the impugned order, a physical copy of the order was dispatch on 27.1.2025, which was received by the petitioner on or around 1.2.2025. The Physical copy was received by one of the employees of the petitioner and through oversight did not inform the proprietor of the petitioner concerned regarding receipt of the order. In wake of the impugned adjudication order, the bank account of the petitioner was attached on 9.5.2025. That was the point when the petitioner came in knowledge about the adjudication order. Therefore, online appeal was preferred challenging the adjudication order with delay of 12 days for preferring the appeal. The appeal under Section 107(4) of the Act was preferred along with the application for condonation of delay of 12 days. The appellate authority passed impugned appeal order dated 18.6.2025, rejecting the appeal on the ground that since the impugned adjudication order was passed on 1.1.2025, the appeal was filed 10 days beyond condonable period of 30 days under Section 107(4) of the Act. In view of the same, both the adjudication order as well as the appellate order are impugned in the present petition.

6. Learned advocate Mr. Uchit Sheth for the petitioner submitted that the impugned appeal order rejecting the appeal of the Petitioner on the ground of limitation is mechanical, bad and illegal. It is not disputed that physical copy of the order was issued on 27.1.2025 and served on 1.2.2025. Once the authority chose to serve the order physically, limitation ought to commence from date of service of physical order. If period of limitation is so computed then the appeal was filed within the condonable period as per Section 107(4) of the Act. The reason for nominal delay was because of the fact that the proprietor came to know of the order only when bank account of the Petitioner was attached and the Petitioner proceeded to file appeal immediately on the next day. Rejection of appeal of the Petitioner on the ground of limitation is therefore mechanical and illegal.

6.1 It was further submitted by Mr. Sheth that issuance of show cause notice and passing of Order-in-Original only on the ground of difference between input tax credit claim as per Form GSTR-3B and Form GSTR-2A is wholly without jurisdiction and illegal. The Petitioner has given explanation regarding the difference which is only because of the fact that credit notes issued by the supplier have been accounted for by admitting output tax liability instead of showing the same as reduction in column of input tax credit. The difference is thus because of a venial reason having no revenue implication. The explanation given by the Petitioner has been brushed aside by a cryptic reason that it is not supported by any section or rule. This has led to double taxation by the impugned order inasmuch as the tax sought to be demanded by way of disallowance of input tax credit has already been paid by the Petitioner along with returns by showing the same in the column of output tax liability.

7. Per contra, learned Assistant Government Pleader Mr. Abhishek Jain for the respondent relying on the affidavit-in-reply has submitted that the Order-in-Original was passed on the ground of difference between input tax credit as per GSTR-3B and Form GSTR-2A. The ITC ought to have been reversed qua credit note issued by the supplier of the petitioner and, therefore, the liability and demand was raised by the Assessment Order. However, Mr. Jain was not in a position to bring out the difference of any surplus demand if the input tax credit was supposed to be reversed qua credit note or if the output tax liability was increased subsequent to the reversal of the credit note. When it was pointed out that both the situations would lead to the same demand, Mr. Jain was not in a position to controvert the same.

8. Having heard learned advocates for the respective parties and having perused the material on record, the small issue into consideration is with regard to the difference between the Form GSTR-3B and Form GSTR-2A and explanation tendered by the petitioner. The petitioner in his reply to the show-cause notice has categorically stated that there is no difference in Form GSTR-3B and Form GSTR-2A and there was no discrepancy in the Form. However, once the explanation is given by the petitioner qua difference of Form GSTR-3B and Form GSTR-2A and the same not being considered, we deem it fit to remand the matter to the adjudicating authority to consider the issue on merits when there is specific averment that there is no difference in the demand when either due to reversal of the input tax credit or increase in the output tax liability qua difference in Form GSTR-3B and Form GSTR-2A. The finding given by the authority at Para-2.1 of adjudication order does not deal with the aspect raised by the petitioner.

9. It is fundamental proposition of law that other side should be heard before any order is passed. The maxim of Audi Alteram Partem is broad enough to include the rule against bias since a fair hearing is must for it to be unbiased hearing. The essential ingredients of fair hearing is that a person should be served with a proper notice and should be given a right to hearing.

10. In view of above, the impugned orders are quashed and set aside and the matter is remanded to respondent no.3 for passing fresh de novo order after giving an opportunity of hearing to the petitioners. Such exercise shall be completed within a period of 12 weeks from the date of receipt of a copy of this order. Rule is made absolute to the aforesaid extent. No order as to costs.