Orissa High Court Clarifies: Voluntary ITC Reversal Bars Further Tax Demand and Interest Where E-Credit Ledger Is Sufficient

The Orissa High Court, in the landmark decision of Manoja Kumar Nayak & Anr. v. Commissioner, GST & Central Excise & Ors., has clearly laid down that once an assessee has voluntarily reversed the disputed input tax credit (ITC) before issuance of a show cause notice, the department cannot again demand the same amount of tax under Section 74 of the CGST Act. Doing so would amount to double taxation and is beyond statutory authority.

Further, the Court ruled that interest under Section 50 is not leviable where the assessee’s Electronic Credit Ledger holds enough balance to cover the disputed ITC and there is no actual utilisation resulting in tax short payment. Since the effective tax liability was nil, the corresponding penalty under Section 74 was also held to be unsustainable.

This decision has significant implications for assessees facing proceedings under Section 74 merely on the basis of alerts or suspicions, particularly where the disputed ITC has already been reversed and there is no demonstrable element of fraud or wilful misstatement.

Background of the Case

Parties and Business Profile

The case involved M/s. Manoja Kumar Nayak (“the Petitioner”), a registered assessee under the CGST Act and OGST Act, engaged in the business of transportation and execution of works contracts. During FY 2017–18, the Petitioner had availed ITC on supplies from M/s. Auxesia Traders.

The Commissioner, GST & Central Excise & Ors. (“the Respondent”) alleged that M/s. Auxesia Traders was a non-genuine entity issuing fake invoices without actual supply, and therefore the ITC availed by the Petitioner was fraudulent.

Initiation of Departmental Proceedings

  1. A letter dated 12.07.2024 was issued to the Petitioner, asserting that the supplier was fictitious and calling upon the Petitioner to reverse ITC of ₹4,39,970 along with interest and penalty.
  2. Subsequently, on 26.07.2024, a Summary Show Cause Notice and a Demand Show Cause Notice were issued under Section 74, alleging that the Petitioner had fraudulently availed ITC and proposing recovery of:
    • Tax equivalent to ₹4,39,970,
    • Interest under Section 50, and
    • Penalty under Section 74.

Voluntary ITC Reversal by the Assessee

Before any show cause notice was issued, the Petitioner had already:

  • Reversed the entire ITC of ₹4,39,970 via GSTR-3B returns for:
    • April 2023, and
    • June 2024.
  • Maintained that its Electronic Credit Ledger had sufficient balance throughout, such that no actual short payment of tax occurred.
  • Contended that interest is attracted only when ITC is both wrongly availed and utilised, not merely on wrongful availment without utilisation, especially when the ledger balance remains adequate.

Despite this, an Order-in-Original dated 03.02.2025 was passed confirming:

  • The demand of tax equivalent to the ITC already reversed,
  • Interest under Section 50, and
  • Penalty under Section 74.

Aggrieved, the Petitioner filed writ petitions before the Orissa High Court in W.P.(C) No. 12682 of 2025 and **W.P.(C) No.