Clipped from: https://taxguru.in/goods-and-service-tax/itc-reversal-fails-gst-registration-cancellation-set-ap-hc.html
Summary: In a practical and taxpayer-friendly ruling, the Andhra Pradesh High Court held that input tax credit (ITC) reversal under Section 29(5) of the CGST Act cannot survive once a GST registration cancellation is set aside. The case arose after a dealer’s registration was cancelled retrospectively due to non-response to portal notices, followed by an automatic demand to reverse the entire ITC lying in the Electronic Credit Ledger. Instead of paying the demand, the taxpayer first challenged the cancellation itself and succeeded in getting the registration restored. The Court ruled that Section 29(5) applies only when a valid cancellation exists; once cancellation is annulled, the very basis for ITC reversal disappears. Consequently, the ITC reversal order and DRC-07 demand were quashed. The judgment reinforces that ITC reversal is not automatic and that consequential demands fall if the foundational action—registration cancellation—is held invalid.
If you’ve been in GST practice for even a few years, you’ve definitely seen this pattern:
Registration gets cancelled.
The department immediately issues a notice:
“Reverse the entire ITC lying in your Electronic Credit Ledger.”
And most taxpayers panic.
But the Andhra Pradesh High Court, in a very practical and common-sense judgment, has now told the department this shortcut doesn’t always work.
Let’s break this down in a simple way.
What actually went wrong in this case?
The assessee, M/s. Hithaishi Infra Machine, was a regular GST dealer. Business was running, ITC was being availed, returns were being filed.
Then, one fine day, the department issued a show cause notice saying:
“You are not available at your principal place of business. Why should your GST registration not be cancelled?”
Now here’s the real-life problem—
The accountant had already left the firm. Notices were uploaded on the GST portal. No reply was filed.
Result?
Registration cancelled.
Cancellation made retrospective.
And of course… the ITC trouble followed.
The ITC demand — the usual GST story
After cancelling the registration, the department did what it usually does:
“Your registration is cancelled. You are holding ITC of ₹22.68 lakh. Reverse it under Section 29(5).”
A DRC-07 demand order was passed.
This is where most taxpayers give up and pay.
But this assessee didn’t.
The smart move: challenge the cancellation first
Instead of directly fighting the ITC demand, the assessee did the right thing.
They asked a basic question:
“If the cancellation itself is wrong, how can anything that follows it survive?”
So they filed a separate writ petition against the cancellation of registration.
And guess what?
The High Court restored the GST registration.
That one order changed the entire ITC story.
Now comes the interesting legal question
Once registration is restored, can the department still say:
“No, no, earlier it was cancelled, so reverse ITC anyway”?
The High Court’s answer was a clear NO.
Let’s talk about Section 29(5)
Section 29(5) of the CGST Act says that when registration is cancelled, the taxpayer must pay back ITC on:
- Inputs lying in stock
- Semi-finished goods
- Finished goods
- Capital goods
Sounds strict, right? But here’s the key point most officers ignore:
Section 29(5) applies only when cancellation legally exists.
“No valid cancellation = No ITC reversal.”
What did the High Court actually say?
The Court looked at the department’s logic and basically said:
“Your entire ITC demand is based on cancellation of registration. But we have already restored the registration. So what exactly are you reversing ITC for?”
Once registration came back, the foundation of the ITC demand vanished.
And therefore:
- ITC reversal order was set aside
- DRC-07 demand was quashed
- Writ petition allowed
Clean and simple.
Let me explain this with a very practical example
Imagine this:
You have ₹25 lakh ITC in your credit ledger.
The department cancels your registration and says:
“Reverse ₹25 lakh.”
You challenge the cancellation and win.
Now tell me honestly—
Should you still lose ₹25 lakh?
Of course not.
That’s exactly what the High Court confirmed.
A big relief judgment for genuine taxpayers
This judgment sends a strong message:
- ITC reversal is not automatic
- Cancellation cannot be used as a weapon
- Consequential demands fall if the main action fails
In many cases, officers first cancel registration casually and then use Section 29(5) as a recovery tool. This judgment shuts that door.
The Court also added a fair disclaimer:
“If there is any real violation, the department is free to initiate fresh proceedings as per law.”
So no blanket immunity. But yes—shortcuts and mechanical demands won’t survive.
Before paying any ITC reversal demand, always ask:
- Was cancellation legal?
- Was an opportunity given?
- Is the cancellation still valid?
Because if cancellation goes, the ITC demand goes with it.
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