Kerala High Court

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INTRODUCTION

The petitioner, Henna Medicals, challenged:

• Assessment Order dated 28.12.2021, and
• Recovery Notice dated 02.09.2023.

The assessment denied Input Tax Credit of ₹2,58,116, along with interest and penalty, resulting in a total demand of approximately ₹4,58,156.

The High Court noted from the assessment order that the sole ground for denying ITC was the mismatch between GSTR-2A and GSTR-3B.

No finding had been recorded regarding:

• fake purchases,
• bogus invoices,
• non-receipt of goods,
• collusion, or
• fraudulent transactions.

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Legal Issues

The Court considered the following questions:

1. Whether ITC can be denied solely because of a mismatch between GSTR-2A and GSTR-3B.
2. Whether the Assessing Authority is required to examine the assessee’s evidence before rejecting ITC.
3. Whether an assessment based only on GSTR mismatch is legally sustainable.

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Petitioner’s Contentions

The petitioner contended that:

• ITC had been denied only because of GSTR mismatch.
• The assessment ignored documentary evidence supporting the claim.
• Such denial was contrary to the settled legal position laid down by the High Court.

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Department’s Stand

From the assessment order examined by the Court, the Department’s case was based only on:

• the difference between GSTR-2A and GSTR-3B.

The judgment records no allegation regarding:

• fictitious suppliers,
• fake invoices,
• non-movement of goods, or
• fraud.

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Detailed Analysis

1. Assessment Was Based Solely on GSTR Mismatch

The High Court observed:

“From the perusal of the Assessment Order … it appears that the only ground on which the petitioner has been said to have availed the input tax credit is the difference between GSTR 2A and GSTR 3B.”

Thus, the Court found that the entire assessment rested exclusively on a portal mismatch.

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2. Reliance on Earlier Kerala High Court Decision in Diya Agencies

The Court expressly relied upon its earlier judgment in:

Diya Agencies v. State Tax Officer

The Court reproduced Paragraph 8 of Diya Agencies, wherein it was held that:

• denial of ITC merely because tax is not reflected in GSTR-2A is unsustainable;
• the Assessing Officer must provide an opportunity to the assessee to produce evidence;
• if the evidence establishes that the ITC claim is bona fide and genuine, ITC must be granted.

This principle was directly applied to the present case.

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3. Consideration of Ecom Gill and Suncraft Energy

The Court noted that while deciding the issue, it had considered:

• State of Karnataka v. Ecom Gill Coffee Trading Private Limited
• Suncraft Energy Pvt. Ltd. v. Assistant Commissioner, State Tax

After considering both decisions, the Court reaffirmed that:

Input Tax Credit under GST cannot be denied merely because of the difference between GSTR-2A and GSTR-3B.

Importantly, the Court did not interpret Ecom Gill as permitting automatic denial of ITC merely due to return mismatch. Instead, it harmonized Ecom Gill with Suncraft Energy by emphasizing that the genuineness of the transaction must be examined through evidence.

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4. Opportunity to Produce Evidence Is Mandatory

The Court held that before denying ITC:

• the assessee must be granted an opportunity to produce evidence;
• the Assessing Authority must evaluate that evidence independently;
• a fresh speaking order must then be passed in accordance with law.

Therefore, procedural fairness and substantive examination were treated as essential requirements.

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5. Remand for Fresh Assessment

Instead of deciding the ITC claim itself, the Court remitted the matter to the Assessing Authority with specific directions:

• to ignore mere GSTR-2A mismatch as the sole basis;
• to examine all documentary evidence produced by the petitioner;
• to pass a fresh assessment in accordance with law.

The petitioner was directed to appear before the Assessing Officer on 03.10.2023 with all supporting evidence.

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Ratio Decidendi

Input Tax Credit cannot be denied solely because of a mismatch between GSTR-2A and GSTR-3B. Where the assessee produces evidence demonstrating that the ITC claim is genuine and bona fide, the Assessing Authority must independently examine such evidence and determine the claim on merits. Portal mismatch alone is not a legally sufficient ground for denial of ITC.

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Significance of the Judgment

The judgment reinforces important principles governing ITC.

1. GSTR-2A Is Not Determinative

A mismatch between GSTR-2A and GSTR-3B does not automatically disentitle a taxpayer from claiming ITC.

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2. Documentary Evidence Prevails

The entitlement to ITC must be determined based on evidence such as:

• tax invoices,
• books of account,
• purchase records,
• payment records,
• transport documents, and
• other supporting material.

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3. Natural Justice Must Be Followed

Before rejecting ITC, the Assessing Authority must provide an effective opportunity to the assessee to substantiate the claim.

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4. Genuine Claims Should Not Be Rejected Mechanically

Portal-generated mismatches cannot replace proper adjudication on facts.

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Relationship with Other Leading Cases

1. Diya Agencies v. State Tax Officer

Henna Medicals is a direct application of Diya Agencies, reaffirming that:

• GSTR-2A mismatch alone cannot justify denial of ITC; and
• documentary evidence must be examined.

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2. Suncraft Energy Pvt. Ltd. v. Assistant Commissioner, State Tax

Both judgments emphasize:

• independent inquiry,
• examination of evidence, and
• protection of bona fide recipients from mechanical denial of ITC.

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3. State of Karnataka v. Ecom Gill Coffee Trading Private Limited

The Kerala High Court read Ecom Gill in its proper context. While Ecom Gill places the burden on the purchaser to establish genuine transactions, Henna Medicals clarifies that such genuineness must be examined through evidence and cannot be rejected merely because GSTR-2A does not match GSTR-3B.

Thus, the judgments are complementary rather than contradictory.

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Application under GST Law

This judgment is highly relevant where ITC is denied due to return mismatches.

Cases Covered

• GSTR-2A mismatch
• GSTR-3B mismatch
• Supplier failed to upload invoices
• Supplier filing defaults

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Evidence Taxpayers Should Produce

To establish genuine ITC claims, taxpayers should maintain:

• tax invoices;
• purchase register;
• stock register;
• books of accounts;
• payment proofs;
• e-way bills;
• transport documents;
• goods receipt notes; and
• supplier confirmations, where available.

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Duty of the Assessing Authority

Before denying ITC, the Assessing Authority must:

• provide an opportunity of hearing;
• examine all documentary evidence;
• determine whether the transactions are genuine; and
• pass a reasoned order based on evidence rather than portal discrepancies alone.

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Conclusion

The Kerala High Court in Henna Medicals v. State Tax Officer (2023:KER:55979) reaffirmed that a difference between GSTR-2A and GSTR-3B cannot, by itself, be the basis for denying Input Tax Credit. Following its earlier decision in Diya Agencies, and after considering the principles laid down in Ecom Gill and Suncraft Energy, the Court held that the Assessing Authority must independently evaluate the evidence produced by the assessee. If the evidence establishes that the ITC claim is genuine and bona fide, the claim must be allowed. Accordingly, the impugned assessment order and recovery notice were quashed, and the matter was remanded for fresh adjudication.

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Tabular Summary