Madras High Court Quashes Tax and Interest Demand on Unutilized ITC Auto-Populated in GSTR-2A/2B for Exempt Supplies

The intersection of auto-populated Input Tax Credit (ITC) and exempt supplies has been a recurring point of litigation under the Goods and Services Tax (GST) regime. A significant judicial intervention occurred in the case of G.R. Organic Company Vs Commercial Tax Officer, where the Madras High Court addressed the legality of demanding tax and interest on ITC that merely appeared in the statutory returns but was never utilized by the assessee.

The core issue revolved around whether the mere reflection of ITC in GSTR-2A and GSTR-2B—arising from inward supplies—automatically triggers a tax and interest liability if the assessee is exclusively engaged in providing exempt goods or services and has not consumed the said credit to offset any outward tax obligations.

Factual Matrix of the Case

The assessee, operating under the name G.R. Organic Company, was engaged entirely in the business of making 100% exempt supplies during the assessment period of 2021-22. During the normal course of business, the assessee received various inward supplies. Consequently, the GST portal auto-populated the corresponding Input Tax Credit in the assessee's GSTR-2A and GSTR-2B forms.