Adjudication Order Overturning ISD Input Tax Credit Set Aside Due

Adjudication Order Overturning ISD Input Tax Credit Set Aside Due To Non-Consideration Of Audit Report

Issue

Whether an adjudication order confirming the recovery of distributed Input Tax Credit (ITC) is sustainable under Section 75 and Section 65 of the CGST/HPGST Act, 2017 when the authority passes a non-speaking order without considering the taxpayer’s defense documents, specifically an existing Audit Report.

Facts

The Petitioner challenged an assessment order passed by the Additional Commissioner, CGST, Shimla, pertaining to the financial periods 2018-19 and 2019-20.
The dispute arose from allegations that an Input Service Distributor (ISD) had wrongly distributed ITC amounting to approximately ₹17.68 crores to the noticee (Petitioner), making it liable for recovery.
In defense, the Petitioner relied upon a crucial Audit Report and requested the adjudicating authority to evaluate all relevant material facts and submissions before finalization.
The adjudicating authority failed to evaluate or address the impact of the Audit Report in the final order, resulting in a non-speaking order that lacked objective application of mind.
The Revenue Respondents failed to produce any evidence or material before the Court to counter the Petitioner’s plea regarding the relevance and necessity of evaluating the Audit Report.

Decision

The High Court observed that because the Revenue failed to rebut the Petitioner’s submissions, the legal and financial impact of the Audit Report inherently required objective valuation by the proper authority.
The Court held that passing a recovery order without dealing with the taxpayer’s documentary defenses and replies constitutes a clear violation of the principles of natural justice and statutory mandate under Section 75.
The High Court set aside and quashed the impugned adjudication order on grounds of procedural lapse and non-consideration of material records.
The matter was remanded to the concerned adjudicating authority with directions to decide the dispute afresh, ensuring proper evaluation of evidence from both sides, including the Audit Report.
The Court clarified that it did not adjudicate upon the core merits of the tax liability, leaving the authority free to make an independent assessment after providing a fair hearing.

Key Takeaways

Mandate for Speaking Orders: Tax authorities are legally bound to pass “speaking orders” that explicitly detail the reasons for accepting or rejecting a taxpayer’s submissions and documentary evidence.
Interplay of Audit and Assessment: Findings or clarifications contained in an Audit Report conducted under Section 65 cannot be summarily ignored during subsequent adjudication under Section 75; they must be actively considered.
Violation of Natural Justice: Confirming a tax demand while leaving the assessee’s reply and evidentiary documents unaddressed invalidates the tax order, making it legally unsustainable.
Remand for De Novo Adjudication: Where an order is set aside strictly for lack of due process and proper appreciation of facts, the judiciary will typically remand the matter for fresh independent proceedings rather than ruling on the tax merits itself.

HIGH COURT OF HIMACHAL PRADESH

Abbott Healthcare (P.) Ltd.

Union of India^*

Vivek Singh Thakur and Ranjan Sharma, JJ.

CWP No. 2696 of 2024

APRIL 24, 2026

Bharat Raichandani and Ishan Kashyap, Advs. for the Petitioner. Nand Lal Thakur, Sr. Panel Counsel, Anup Rattan, Adv. General, Sushant Keprate, Addl. Adv. General, Vijay K. Arora, Sr. Adv., Hitansh Raj and Gaurav Kumar, Advs. for the Respondent.

ORDER

Vivek Singh Thakur, J.– This petition has been preferred against the impugned order dated 29.12.2023 passed by respondent No.4, i.e. Additional Commissioner, Central Goods & Services Tax, Shimla, H.P.

2. On 22.05.2025, following order was passed by this Court in this matter:-

“Learned counsel for the petitioner on instructions states that the petitioner is mainly agitating the findings recorded by the Additional Commissioner, regarding wrong availment of ITC amounting to Rs.17,67,81,453/- on invoices issued by the ISD during 2018-19 and 2019-20.

A perusal of the order goes to show that adjudicating authority has specifically held in para 4.6.12 of its finding that a credit of Rs.17,67,81,453/- has been wrongly distributed by the ISD to the Noticee as such is recoverable from the Noticee in terms of the provisions of CGST Act, 2017 and HPGST Act, 2017 read with Section 20 of the IGST Act, 2017.

In furtherance to his submissions, today learned counsel for the petitioner has placed before us a copy of the Audit Report under Section 65(6) of the CGST Act, wherein, a clean chit has been given to the petitioner with regard to the aforesaid amount.

Confronted with this, learned counsel for the respondents pray for and are granted time to seek instructions.

List on 05.06.2025.”

3. Till date, respondents have not placed any material on record to rebut the aforesaid plea. Impact of Audit Report being relied upon by the petitioner is required to be adjudicated by the concerned Authority.

4. In view of the above, impugned order dated 29.12.2023 is set aside with a direction to the Additional Commissioner, Central Goods & Services Tax, Shimla, H.P., to decide the matter afresh by taking into consideration the submissions made and material placed on record on behalf of the appellant as well as the Revenue Department.

5. Needful be done within two months.

6. Necessary exercise by the concerned officer(s) be completed as expeditiously as possible, preferably within two months from today.

7. Needless to say, we have not adjudicated any issue on merit including the merits of the show cause notice as well as objections raised by petitioner. Concerned Authority shall adjudicate the matter afresh without being influenced by this order or any other observations made by this Court.

8. Accordingly, petition stands disposed of being infructuous along with pending miscellaneous application(s), if any.