Karnataka HC Quashes Excess-ITC Orders Against Closed Hotel, Gives It Chance To Substantiate Prior-Year Credit

The petitioner, a proprietorship, obtained cancellation of its GST registration on 18 January 2022 after deciding to close its business.

It was issued an intimation in Form GST DRC-01A on 16 July 2022 and a show-cause notice on 7 October 2022 alleging excess availment of input tax credit (ITC).

The petitioner said it had not received the notice and contended that the apparent difference between GSTR-2A and GSTR-3B arose because it had carried forward ITC available from the previous financial year.

The respondent stated that the notice had been received, while the adjudication order was returned from the petitioner’s registered address as the firm was no longer there.

The adjudication order was made on 30 January 2023, but its summary was uploaded on 23 April 2024.

The petitioner challenged both orders under Articles 226 and 227 of the Constitution.

The petition invoked Articles 226 and 227 of the Constitution and challenged an adjudication under Section 73 of the CGST Act; the petition also raised entitlement to ITC under Section 16 of the CGST Act.

The Court did not cite any precedent or finally determine the petitioner’s substantive liability. Its operative approach was to set aside the adjudication and restore the proceedings where the circumstances warranted a further opportunity to respond, leaving the ITC claim for verification by the respondent.

The Court considered the petitioner’s business closure and cancellation of registration, the uncertainty over whether the notice and order had effectively come to the petitioner’s attention, and the fact that the order summary was uploaded only in April 2024, after the January 2023 adjudication order.

It also noted that the petitioner’s claim to have available ITC from the previous financial year had not been verified.

In these circumstances, the Court found it appropriate to restore the proceedings and allow the petitioner to substantiate its claim, rather than decide the ITC issue on the merits.

The adjudication order dated 30 January 2023 and its summary dated 23 April 2024 were quashed, and the proceedings were restored to the respondent.

The petitioner was directed to file its response to the show-cause notice dated 7 October 2022, with supporting documents concerning the claimed previous-year ITC, on 16 November 2026, without further notice.

The Court did not decide whether the petitioner was ultimately entitled to the ITC or liable for tax, interest, or penalty.