• Dated 01^st December, 2025

ITC availed under wrong head cannot be treated as wrong utilisation of ITC

Facts of the Case

The petitioner being a registered taxpayer under the CGST Act, 2017, became subject to proceedings under Section 73 of the Act on allegations of wrongful availment of Input Tax Credit (ITC) in contravention of Section 16(2)(c) thereof. Consequent to the issuance of a Show Cause Notice, an adjudication order was passed, determining an excess ITC of Rs. 2,00,219/- each under CGST and SGST, and directing the petitioner to discharge the said amount along with applicable interest and penalty within three months of the date of passing the order. The petitioner thereafter filed a rectification petition, which was also dismissed. Being aggrieved by the aforesaid orders, the petitioner has preferred the present writ petition before this Hon'ble High Court.

Assessee's Contention

The petitioner contended that there was no substantive wrong availment of Input Tax Credit (ITC), as the credit legitimately available under IGST had merely been utilized under the heads of CGST and SGST. It was submitted that such a procedural misclassification could not constitute wrongful availment of ITC, as the aggregate quantum of eligible credit remained unaffected. Further, reliance was placed on the decision of the Hon'ble Kerala High Court in Rejimon Padickapparambil Alex vs. Union of India [2025 (93) G.S.T.L. 23 (Ker.) = (2024) 25 Centax 108 (Ker.)], wherein it was held that there can be no wrongful availment of ITC where credit available under IGST is availed under CGST and SGST.

Department Contention

The Department contended that the petitioner had erroneously availed Input Tax Credit (ITC) under CGST and SGST heads instead of IGST, and therefore, the demand and determination made under Section 73 of the CGST Act, 2017 were proper and did not warrant interference by the Court. It was further submitted that the impugned orders were legally valid and sustainable, and that the petitioner's request for rectification had been appropriately rejected in accordance with law.

Held

The Hon'ble Kerala High Court observed that the Electronic Credit Ledger operates as a consolidated pool of funds allocated for different tax heads namely IGST, CGST, and SGST. The Court likened the ledger to a wallet with separate compartments, noting that availing credit under an incorrect head (CGST/SGST instead of IGST) does not by itself amount to wrongful availment. The court relying on the decision in Rejimon Padickapparambil Alex (supra), the Court held that the principles laid down therein were applicable to the petitioner. Consequently, the impugned aforesaid orders were set aside, and the matter was remanded for fresh consideration in accordance with the legal position established in the cited case. The writ petition was allowed, with a direction to reconsider the matter within three months from receipt of the judgment copy.

BTA Remarks

The proceeding under Section 73 in cases of minor technical misclassification may violate the principles of proportionality and natural justice, especially when the taxpayer corrects the error or when no revenue loss occurs. While the ITC ledger has separate heads (IGST, CGST, SGST), the Court implicitly recognizes some fungibility of credits. A misreported head does not automatically lead to loss or denial of credit. The Courts need to distinguish between administrative/filing errors and substantive wrongdoing. Tax authorities should not equate a return filing mistake with a wrongful claim, as long as the ITC is genuinely available.

Case Reference- Maruthengal Moideen Vs State Tax Officer, KSGST Department, Malappuram- WP (C) No. 20837 of 2024, decided on 13-01-2025.

Author: Sneha Jhunjhunwala

Edited by: Saket Shaw