In a significant ruling on GST recovery proceedings, the Andhra Pradesh High Court has directed authorities to verify whether Input Tax Credit (ITC) adjustments extinguish liability for interest and penalty under Sections 50(3) and 74 of the APGST/CGST Act, 2017. The Court stayed coercive recovery pending this verification, emphasizing that demands cannot be sustained where ITC has been availed but not utilized.
Background & Facts
The Dispute
The petitioner, M/s. Sai Bhaskara Agencies, a GST-registered entity (GSTIN 37BUEPP5070Q1ZW), challenged an Urgent Notice dated 15.04.2026 issued by the Assistant Commissioner (ST), Chinawaltair Circle, Visakhapatnam. The notice demanded Rs. 12,42,726 towards interest and penalty for delayed payment of CGST and SGST for the period July 2017 - March 2018. The petitioner contended that the tax dues had already been cleared through adjustment against ITC available in its electronic credit ledger between 24.01.2024 and 21.05.2024, leaving no outstanding liability.
Key Facts
- GST Registration: The petitioner is a registered taxpayer under the APGST/CGST Act, 2017
- Demand Notice: Form GST DRC-07 (Reference No. ZD370225008591L) dated 04.02.2025 issued by the 2nd respondent
- Urgent Notice: DIN 3725032622822 dated 15.04.2026 calling for payment of Rs. 12,42,726
- ITC Adjustment: Petitioner claims tax dues were cleared via ITC adjustment in January - May 2024
- Statutory Provisions: Dispute revolves around Section 50(3) (interest on delayed payment) and Section 74 (penalty for fraud/evading tax) of the APGST/CGST Act, 2017
Procedural History
- 04.02.2025: Impugned order in Form GST DRC-07 issued by the 2nd respondent
- 15.04.2026: Urgent Notice demanding Rs. 12,42,726 served on the petitioner
- 2026: Writ Petition No. 15587/2026 filed under Article 226 before the Andhra Pradesh High Court
- IA No. 1 of 2026: Interim application seeking stay on recovery
Relief Sought
The petitioner sought:
- Quashing of the Form GST DRC-07 order dated 04.02.2025 and the Urgent Notice dated 15.04.2026 as illegal and without jurisdiction
- Declaration that interest under Section 50(3) and penalty under Section 74 are not sustainable where ITC has been availed but not utilized
- Stay on coercive recovery pending disposal of the representation
The Legal Issue
The central question was whether interest under Section 50(3) and penalty under Section 74 of the APGST/CGST Act, 2017 can be demanded where the taxpayer has availed ITC but not utilized it, and the tax dues have been cleared through adjustment against such ITC.
Arguments Presented
For the Petitioner
- ITC Adjustment: The petitioner argued that the tax dues for the period July 2017 - March 2018 were cleared via ITC adjustment in 2024, leaving no outstanding liability
- No Utilization: Since the ITC was availed but not utilized, the demand for interest and penalty was unsustainable in law
- Arbitrary Demand: The impugned notices were issued without verifying the ITC adjustment, rendering them arbitrary and without jurisdiction
For the Respondents
- Government Pleader for Commercial Tax appeared but did not contest the petitioner’s factual claims during the hearing
- No specific counter-arguments were recorded in the judgment
The Court's Analysis
The Court observed that the petitioner’s contention - that the tax dues had been cleared via ITC adjustment - required verification. The Court held:
"It would be appropriate to dispose of this writ petition giving liberty to the petitioner to file a representation before the 2nd respondent to clarify whether any further interest or penalty would remain due as the amounts have already been paid."
The Court directed:
- The petitioner to file a representation within one week from the date of the judgment (22.06.2026)
- The 1st respondent to verify whether tax dues were cleared within the permissible time and consequently whether interest and penalty are payable
- The decision to be taken within three weeks from the date of filing the representation
- Stay on recovery till disposal of the representation
The Court emphasized that the demand for interest and penalty cannot be sustained without verifying the ITC adjustment, ensuring that taxpayers are not subjected to arbitrary recovery proceedings.
The Verdict
The Court disposed of the writ petition with the following directions:
- The petitioner may file a representation before the 2nd respondent within one week (by 29.06.2026)
- The 1st respondent shall verify the ITC adjustment and decide on the liability for interest/penalty within three weeks (by 20.07.2026)
- Stay on recovery of Rs. 12,42,726 under the impugned notices until disposal of the representation
- Pending miscellaneous applications, if any, stand closed
What This Means For Similar Cases
ITC Adjustment Extinguishes Liability for Interest/Penalty
- Burden of Proof: Tax authorities must verify ITC adjustments before issuing demands for interest/penalty under Sections 50(3) and 74
- No Automatic Recovery: Recovery proceedings cannot be initiated solely based on delayed payment without confirming whether ITC was availed and adjusted
- Stay on Coercive Steps: Courts are likely to stay recovery pending verification of ITC claims, as seen in this case
Procedural Safeguards Against Arbitrary Demands
- Representation as a Remedy: Taxpayers can file representations to contest demands, and authorities must decide within a reasonable timeframe (here, 3 weeks)
- Judicial Scrutiny: High Courts may intervene under Article 226 where demands are issued without verifying factual claims, especially in GST matters
- Liberty to Approach Authorities: Courts may dispose of writ petitions with liberty to approach lower authorities, ensuring expeditious resolution without prolonged litigation
Implications for GST Practitioners
- Audit Trail: Maintain detailed records of ITC adjustments to contest unjust demands
- Pre-Demand Verification: Authorities must cross-check ITC ledgers before issuing notices under Section 74 (penalty) or Section 50(3) (interest)
- Interim Relief: Seek stay on recovery in writ petitions where ITC adjustments are disputed, as courts are inclined to grant such relief pending verification
