Transitional Credit Rejection Quashed Due to Failure by Revenue Authorities to Cross-Verify Returns

Transitional Credit Rejection Quashed Due to Failure by Revenue Authorities to Cross-Verify Returns

Issue

Whether a final assessment order confirming the denial of transitional input tax credit claimed via Form GST TRAN-01 is legally sustainable if the tax authority fails to cross-verify the taxpayer’s closing stock assertions against subsequent statutory filings like GSTR-1, GSTR-3B, GSTR-9, and GSTR-2A.

Facts

• The petitioner transitioned input tax credit on closing stock held as of June 30, 2017, by filing the statutory Form GST TRAN-01.

• In 2021, the revenue department issued a Show Cause Notice proposing to deny the transitioned credit.

• The processing authority passed an Order-in-Original in 2023 confirming the total disallowance of the credit, citing the absence of a proper reply from the taxpayer.

• Following the assessment order, the department issued a formal summary demand notice in Form GST DRC-07.

• The petitioner filed a writ petition before the High Court to challenge the final credit denial and the resulting tax demand.

• The High Court reviewed the records and found that while the petitioner’s reply asserted stock availability, it lacked comprehensive granular particulars.

Decision

• The High Court held that transitional credit relates directly to tax paid on physical stock present on the appointed day, which can be verified by reviewing subsequent tax returns.

• The court observed that a forensic examination of post-GST returns like GSTR-1, GSTR-3B, GSTR-9/9C, and auto-populated GSTR-2A forms would have easily regularized and reconciled the stock figures claimed in the TRAN-01.

• The court ruled that although the petitioner is required to substantiate its stock records and subsequent liquidation, the tax authority is equally obligated to conduct an independent verification before confirming a massive tax demand.

• Because the department confirmed the tax demand mechanically without executing this necessary return-reconciliation exercise, the final Order-in-Original could not be legally sustained.

• The High Court quashed the impugned order and summary demand, remanding the matter back to the authority for a fresh, merit-based adjudication.

Key Takeaways

• Mandate for Data Reconciliation: Tax authorities cannot reject transitional credit claims simply by pointing to vague replies. They must cross-examine and reconcile the TRAN-01 claims against the taxpayer’s regular, post-GST statutory filings like GSTR-2A and annual returns.

• Co-Extensive Burden of Proof: While the primary burden to prove stock availability rests on the taxpayer, the assessing officer holds a co-extensive duty to leverage internal electronic tax data to verify those assertions before creating a tax liability.

• Remand Orders Maintain Neutrality: A judicial remand for lack of verification does not automatically validate the credit claim; it reopens the administrative window, forcing both the taxpayer to produce concrete invoices and the officer to verify them properly.