Orissa HC Quashes Groundless Rectification Refusal Without Examining ITC Adjustment Documents
Introduction
The Orissa High Court recently disposed of a writ petition filed by Bharat Motors Limited against the Chief Commissioner of CT & GST, wherein the petitioner contested the rejection of its rectification application without proper examination of reconciliation statements and supporting documentation. The Court's intervention came after the tax authority dismissed the rectification plea under Section 161 without affording adequate hearing or considering documents establishing proper input tax credit adjustment.
Background and Factual Matrix
The present dispute emerged from audit proceedings conducted under Section 65 for the assessment year 2020–21. Post-audit, the revenue department initiated proceedings under Section 73 alleging that the company had not reversed input tax credit corresponding to credit notes issued by suppliers. The core allegation centered on the assertion that ITC claimed in GSTR-3B exceeded the credit available in GSTR-2A.
Following the audit observations, an adjudication order was issued on 27th February 2025 confirming a demand consisting of tax liability, interest component, and penalty. The adjudicating authority concluded that the assessee failed to reverse ITC pertaining to credit notes and observed that supporting documentation was not furnished during assessment proceedings.
Rectification Application Filing
Dissatisfied with the adjudication outcome, the company submitted a rectification application on 29th March 2025 under Section 161, raising the following contentions:
The assessee maintained that ITC was claimed in GSTR-3B strictly limited to the credit available in GSTR-2A during the relevant period. It was asserted that credit notes issued by GST suppliers resulted in ITC reversal amounting to Rs.2,94,44,152.93 (comprising Rs.2,86,38,277/- under IGST, Rs.90,787.28 each under CGST & SGST, and Cess of Rs.6,24,301.70), which had been adjusted through net-off mechanism as reflected in Table 8A of GSTR-9.
The application emphasized that purchase registers, reconciliation statements, and detailed credit note ledgers had been submitted during assessment proceedings and formed part of assessment records. It was contended that the adjudication order's finding regarding non-production of supporting documents contradicted factual records, especially when such details were verifiable on the GST portal itself.
The assessee further pointed out that the allegation concerning non-submission of original credit notes was never raised during adjudication proceedings. Moreover, it was argued that this requirement was irrelevant since credit notes were already reflected in GSTR-2A and appropriately adjusted in purchase registers without claiming corresponding ITC.
Proceedings Before Appellate Authority
The assessee was required to appear on 7th August 2025, whereupon a comprehensive reply was filed asserting that no excess ITC had been claimed in GSTR-3B when compared with GSTR-2A/2B. Consequently, it was maintained that no reversal obligation arose.
Reference was made to Circular No.105/24/2019-GST dated 28th June 2019, which addresses situations where credit notes are issued pursuant to commercial arrangements such as post-sale discounts, incentives, or similar schemes. The circular clarifies that when credit notes represent post-sale adjustments rather than distinct supply transactions, the corresponding ITC can be adjusted in returns from eligible credit without necessitating separate entries in GSTR-3B or DRC-3.
Particular attention was drawn to paragraph 5 of the said circular, which states:
"5. There may be cases where post-sales discount granted by the supplier of goods is not permitted to be excluded from the value of supply in the hands of the said supplier not being in accordance with the provisions contained in sub-section (3) of Section 15 of the CGST Act. It has already been clarified vide Circular No.92/11/2019-GST dated 7th March, 2019 that the supplier of goods can issue financial/commercial credit notes in such cases but he will not be eligible to reduce his original tax liability. Doubts have been raised as to whether the dealer will be eligible to take ITC of the original amount of tax paid by the supplier of goods or only to the extent of tax payable on value net of amount for which such financial/commercial credit notes have been received by him. It is clarified that the dealer will not be required to reverse ITC attributable to the tax already paid on such post-sale discount received by him through issuance of financial/commercial credit notes by the supplier of goods in view of the provisions contained in second proviso to sub-rule (1) of rule 37 of the CGST Rules read with second proviso to sub-section (2) of Section 16 of the CGST Act as long as the dealer pays the value of the supply as reduced after adjusting the amount of post-sale discount in terms of financial/commercial credit notes received by him from the supplier of goods plus the amount of original tax charged by the supplier."
The assessee submitted a detailed reconciliation summary demonstrating that no reversal was required under applicable GST provisions or subordinate rules.
Rectification Application Rejection
On 1st September 2025, the Assistant Commissioner of CT & GST, Bhubaneswar-1 Circle rejected the rectification application. The rejection order primarily reproduced statutory provisions under Section 161 of the Odisha Goods and Services Tax Act without providing substantive reasons for dismissing the application.
The rejection was premised on absence of original credit notes along with purchase invoices. However, the authority did not examine whether the information was available on the GST portal or verify the reconciliation summaries submitted by the assessee.