Validity of ITC Reversal under Section 29(5) Post-Restoration of GST Registration: Andhra Pradesh High Court Ruling

In the realm of Goods and Services Tax (GST) compliance, the cancellation of registration is often viewed as a definitive cessation of business operations by the Revenue Department. This administrative action frequently triggers a cascade of coercive recovery measures, most notably the demand for reversal of Input Tax Credit (ITC) held in the electronic credit ledger. The statutory basis for such demands is anchored in Section 29(5) of the CGST Act, which mandates that an assessee must debit the electronic credit or cash ledger equivalent to the credit availed on inputs in stock or capital goods upon cancellation.

However, a pivotal legal question arises: Does the liability to reverse ITC persist if the underlying order of cancellation is subsequently revoked or set aside by a judicial forum? Addressing this significant conundrum, the Hon'ble Andhra Pradesh High Court delivered a landmark judgment in the case of M/s. Hithaishi Infra Machine. The Court elucidated that once the cancellation of registration is annulled, the consequential demand for ITC reversal loses its legal footing and cannot be sustained.

The Factual Matrix

The controversy originated when the GST registration of the assessee, M/s. Hithaishi Infra Machine, was cancelled by the jurisdictional Proper Officer. The sequence of events leading to this litigation is a common narrative in the current GST landscape.

The Department initiated proceedings by issuing a Show Cause Notice (SCN) alleging that the assessee was not functioning from their declared principal place of business. Unfortunately, due to internal administrative issues—specifically, the departure of the accountant handling tax matters—the assessee failed to notice the SCN uploaded on the common portal. Consequently, no reply was filed, leading the Proper Officer to issue an order cancelling the GST registration with retrospective effect.

Following the cancellation, the Department invoked Section 29(5) of the CGST Act. The authorities calculated the ITC available in the assessee's electronic credit ledger, amounting to approximately Rs. 22.68 lakh, and raised a demand for its reversal. This demand was formalized through the issuance of an order in Form GST DRC-07.