Proper verification of transactions and the requirement for a match of details in claims of Input Tax Credit, as mandated by Section 42(3) of the CGST Act, are crucial for the assessment process.

JUDGMENT

(Prayer: Writ Petition filed under Article 226 of the Constitution of India, to issue a Writ of Certiorari, calling for the records relating to the show cause notice No.129/2022-Audit-1 dated 31.03.2022 issued by the 1st respondent answerable to the 2nd respondent and quash the same as arbitrary, unsustainable in law and without authority of law.)

1. Mrs.Hema Muralikrishnan, learned Senior Standing Counsel accepts notice for the respondents and is armed with necessary instructions to enable this Court to dispose the matter finally even at the stage of admission. Hence, by consent of both sides, this Writ Petition is disposed finally even at this stage.

2. The challenge is to a show cause notice dated 31.03.2022. There is no legal infirmity that has been pointed out in the impugned order. Therefore, I am not inclined to entertain the challenge.

3. The only point that is made out is that the issue raised in the show cause notice relates to the claim of Input Tax Credit (ITC) and the Assessing Authority has sought various particulars in regard to the procedure for matching the same while considering the grant or otherwise.

4. Section 42 of the Central Goods and Services Tax, 2017 (in short 'CGST Act') deals with matching, reversal and reclaim of ITC, and requires the Officer to conduct simultaneous investigation, both with the purchaser and the supplier, to ensure that there is a proper examination of the transaction at both ends. In fact, Section 42(3) provides for this in express terms and is extracted below:

42. Matching, reversal and reclaim of input tax credit-

..........

(3) Where the input tax credit claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy shall be communicated to both such persons in such manner as may be prescribed.

5. Learned Senior Standing Counsel would draw attention of this Court to Section 42(5) of the CGST Act, in terms of which, a reversal of ITC should be a natural consequence in the event of any discrepancy in the claim.

6. Evidently so. However, what is required is that in matters involving claim of ITC, it is incumbent upon the authority to conduct a proper verification of the transactions of selling/purchasing dealers to ensure that there is a match of the details of the transaction, at both ends. This is why Section 42(3) requires the officer to supply the details of the transaction to 'both such persons' to enable such cross-verification.

7. In this context, reference may also be made to Circular No.5 of 2021 dated 24.02.2021 issued by the Principal Secretary/Commissioner of Commercial Taxes under the Value Added Tax regime, providing for the procedure to be followed in the case of verification of claims of ITC involving selling/purchasing dealers.

8. Paragraph 3.3.5 of the Circular which deals with the procedure has some relevance in matters under TNGST and CGST regime as well and is re-produced below:

“Circular No.5/2021

LW10/12521/2016

Office of the Principal Secretary/

Commissioner of Commercial Taxes,

Chepauk, Chennai – 600 005.

dated: 24.02.2021

Circular

The Hon'ble High Court of Madras in a batch of cases involving in denial of input tax credit or arising of tax liability due to purchase and sales suppression on the basis of the computer generated mismatch report