Demand Order Set Aside for Non-Consideration of Credit Notes and Other Documents, Matter Remanded

Issue:

Whether a demand order passed by the respondent authority under Section 73 of the Central Goods and Services Tax Act, 2017 (CGST Act), is valid when it fails to consider and appreciate the detailed reply, specifically credit notes and other documents, submitted by the assessee in response to the show cause notice.

Facts:

The assessee challenged an order passed by the respondent authority. According to the assessee, they had submitted a detailed reply to the show cause notice (SCN), addressing various observations made therein, including those related to inward supply as per GSTR-2A. In this reply, the assessee had not only presented their contentions but also referred to and produced specific documents, notably credit notes, which they argued had not been considered or properly appreciated by the respondent authority while passing the impugned order.

Decision:

The court held that various contentions and documents, particularly the credit notes produced by the assessee, had not been considered and appreciated in the proper perspective by the respondent authority. Therefore, the impugned order was set aside, and the matter was remanded for fresh adjudication, in favor of the assessee.

Key Takeaways:

Mandatory Consideration of Reply and Evidence: Adjudicating authorities are legally bound to thoroughly consider and apply their minds to all contentions, explanations, and documentary evidence (such as credit notes) submitted by an assessee in response to a show cause notice.
Credit Notes as Crucial Evidence: Credit notes play a vital role in adjusting tax liabilities, particularly in cases of returns, price reductions, or corrections of supplies. Their non-consideration can significantly impact the accuracy of a demand order.
Violation of Natural Justice: Failure to consider material evidence and contentions amounts to a denial of a proper opportunity of being heard, which is a violation of the principles of natural justice.
Speaking Order Requirement: A valid order must be a “speaking order,” meaning it should reflect due application of mind to all arguments and evidence. Simply stating that a reply is unsatisfactory without addressing specific points and documents is insufficient.
Remand as Remedy: When an order is found to be deficient due to non-consideration of material evidence, the appropriate judicial remedy is to set aside the order and remand the matter back to the adjudicating authority for fresh consideration after duly taking into account all submissions and documents.

HIGH COURT OF KARNATAKA

Sait Nagjee Purushotham and Company (P.) Ltd.

Commercial Tax Officer

S.R. Krishna Kumar, J.

WRIT PETITION NO. 11130 OF 2025 (T-RES)

APRIL 29, 2025

Adarsh Mohandas and Neeraj Sastry, Advs. for the Petitioner. Smt. Jyoti M. Maradi, HCGP for the Respondent.

ORDER

1. In this petition, petitioner seeks the following reliefs:

“Wherefore, the Petitioner above named most respectfully prays that this Hon’ble Court may be pleased to:

A. ISSUE a Writ in the nature of CERTIORARI or any such / other writ, direction or order to QUASH the Impugned Order issued by Respondent No. 1 dated 26.12.2024 bearing No. ZD2912240868026 and rio:ETO3te(d^)-5/^yrio.2024-25 dated 26 12.2024 (Annexures A2 & A11); and

B. GRANT such other relief as this Hon’ble Court may deem fit to grant in the interest of justice and equity, as the facts and circumstances of this case warrant.”

2. Heard learned counsel for the petitioner and learned High Court Government Pleader for the respondents and perused the material on record.

3. In addition to reiterating the various contentions urged in the petition and referring to the material on record, learned counsel for the petitioner invited my attention to the impugned show cause notice dated 26.11.2024 at Annexure-H1 and H2 in order to point out that the petitioner had submitted reply at Annexure-J dated 24.12.2024, specifically replying to the various observations made in the said show cause notice, including the Observation No.2 in relation to inward supply as per GSTR 2A. In this context, it is contended that in the reply dated 24.12.2024, petitioner had not only put forth his contention in relation to observation No.2, but also referred to and produced credit note and other documents which have not been considered or appreciated by respondent No.1 while passing the impugned order at Annexure-A1 dated 26.12.2024 without considering the various contentions urged in the reply submitted by the petitioner and as such, the impugned order deserves to be set aside and the matter be remitted back to respondent No.1 for reconsideration afresh in accordance with law.

4. In support of his submission, he places reliance upon the judgment of the Judicature at Madras in the case of M/S. OASYS CYBERNETICS PRIVATE LIMITED v. STATE TAX OFFICER W.P.NO.9624/2024 AND W.M.P.NOS. 10656 AND 10657 OF 2024 DD 12.04.2024.

5. Per contra, learned counsel HCGP for the respondents would submit that there is no merit in the petition and that the same is liable to be dismissed.

6. Before adverting to the rival contentions, it would be necessary to refer to the judgment of the Madras High Court in the case of M/S. OASYS CYBERNETICS PRIVATE LIMITED v. STATE TAX OFFICER, referred Supra, wherein, it is held as below:

“An assessment order dated 29.12.2023 is challenged in this writ petition. The petitioner is engaged in the business of supplying and installing point of sale machines in ration shops operated by the Tamil Nadu Civil Supplies Corporation by integrating the same with a central server. In respect of assessment period 2017-18, the petitioner received show cause notice dated 14.09.2023 with regard to discrepancies between the petitioner’s GSTR 3B returns and the auto populated GSTR 2A. Such show cause notice was replied to on 10.10.2023 and 17.10.2023 by enclosing annexures. The impugned order was issued on 29.12.2023 in the said facts and circumstances.

2. Learned counsel for the petitioner contended that the discrepancy arose on account of about three reasons. The first of these was the issuance of credit notes by the petitioner to the recipient of services. Since it was the first year of implementation of GST statutes, learned counsel submitted that such credit notes were not reflected under the 9B heading of the GSTR 1 statements and instead reflected in the heading relating to B2C (others) transactions. By adverting to the petitioner’s reply in this regard, he pointed out that the petitioner stated that the credit notes were erroneously reported as Input Tax Credit and that there was no revenue impact as a consequence. He further submitted that the relevant credit notes were enclosed. As regards other reasons for the discrepancy, learned counsel submitted that the petitioner submitted a certificate dated 16.12.2023 from the Chartered Accountant in compliance with Circular No.183. By referring to the impugned order, learned counsel submitted that these contentions were not taken into consideration by the assessing officer, and that ITC to the extent of Rs.4,08,39,428/- was reversed because the petitioner made an inadvertent error in the manner of reporting thereof in the GSTR 1 statement. Likewise, he submitted that the certificate produced by the Chartered Accountant was rejected without assigning any reasons.

3. Mr.T.N.C.Kaushik, learned Additional Government Pleader, accepts notice for the respondent. He points out that the petitioner should have reflected the credit notes in the GSTR 1 statement under the appropriate heading pertaining to credit / debit notes. He also submits that the amounts mentioned under the heading 7-B2C does not tally with the value of credit notes issued by the petitioner.

4. The petitioner has placed the GSTR 1 statement on record. As submitted by learned counsel for the petitioner, no entries are made with regard to credit / debit notes. Instead, in the heading relating to B2C, total invoice value of minus Rs.15,58,21,210.14/- and total taxable value of minus Rs.13,20,51,873/- is shown. In the reply of the petitioner to the show cause notice, it is stated that credit notes were erroneously reported as ITC. In the impugned order, the assessing officer dealt with the above contentions by recording the following findings:

“The contention of taxpayer is, the above credit note for Rs.4,08,39,428.00 was wrongly taken into in the ITC register for the month of January 2018, but on verification of the GSTR-1, it is noticed there is no such invoices and credit notes has been reported further, the Government has announced any omission of datas has to be reported opportunity for the tax period 2017-18 time extended still 23.04.2019. But the taxpayer has not reported for the credit notes in the GSTR-1.

Further on verification of the GSTR-2A of the recipient of Tvl..Tamil Nadu Civil Supplier, neither the above invoice nor the credit notes reflected for the period from 01.07.2017 to 23.04.2019.

In the view of the above fact, the taxpayer reply is not acceptable, the reversal of ITC of Rs.4,08,39,428.00 under TNGST Act/CGST Act is confirmed.”

Sl.No.	Head	Tax (Rs.)	Interest (Rs.)	Penalty (Rs.)
1.	CGST	20419714.00	21519581.00	2041971.00
2.	SGST	20419714.00	21519581.00	2041971.00

5. On examining the above findings, I find that the explanation of the petitioner was not duly examined from the perspective of ascertaining whether the amount reflected as ITC tallies with the value of credit notes issued by the petitioner. If such exercise had been carried out, it would become clear as to whether there was revenue loss by way of excess availment of ITC. Since such exercise was not carried out and findings were recorded confirming the tax demand merely because credit notes were not duly reported in GSTR 1 or in the auto populated GSTR 2A, the impugned order calls for interference on this issue.

6. As regards the provision of a Chartered Accountant’s certificate to explain the discrepancy to the extent of about Rs.53,18,913/-, the impugned order merely records that the certificate issued by the Chartered Accountant and the petitioner’s reply are not accepted. It is unclear as to why the certificate was rejected because no reasons are discernible from the impugned order.

7. For reasons set out above, the impugned order calls for interference and is hereby set aside. As a corollary, the matter is remanded for re-consideration by the respondent. The respondent is directed to provide a reasonable opportunity to the petitioner, including a personal hearing, and thereafter issue a fresh order after taking into consideration the contentions of the petitioner. Such order shall be issued within two months from the date of receipt of a copy of this order.

8. W.P.No.9624 of 2024 is disposed of on the above terms. No costs. Consequently, W.M.P.Nos. 10656 and 10657 of 2024 are closed.

7. As can be seen from the afore said judgment, non consideration/non appreciation of the credit note has been held to be a circumstance by the Madras High Court, to set aside the order impugned therein and remit the matter back to the respondent therein for reconsideration afresh in accordance with law.

8. In the instant case, a perusal of the material on record, in particular, the observation No.2 contained in the show cause notice and the reply submitted by the petitioner to the same is sufficient to come to the conclusion that various contentions as well as documents, in particular, the credit note produced by the petitioner has not been considered and appreciated in proper perspective by respondent No.1 and in the light of the judgment of the Madras High Court referred supra, I deem it just and appropriate to set aside the impugned order and remit the matter back to respondent No.1 for reconsideration afresh in accordance with law.

9. In the result, pass the following:

ORDER

(i)

The petition is hereby allowed.

(ii)

Impugned order at Annexures-A1 and A2 dated 26.12.2024 are hereby set aside.

(iii)

Matter is remitted back to respondent No.1 for reconsideration afresh in accordance with law.

(iv)

Petitioner undertakes to appear before respondent No.1 on 19.05.2025 without awaiting for notice from respondent No.1.

(v)

Liberty is reserved in favour of the petitioner to file additional pleadings, documents, etc., which shall be considered by respondent No.1 who shall provide sufficient and reasonable opportunity to the petitioner and proceed further in accordance with law.