Tax Vista

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Edn. 278 - 9th March 2026

Kasi Viswanathan V

Refund adjustment against disputed Interest Liability

Transitional credit was reflected twice, once through the TRAN form and again through GSTR-3B. The excess was eventually reversed in April 2019. The department treated the period between July 2017 and the date of reversal as attracting interest under section 50(3) and adjusted the amount against the taxpayer's refund claim of the balance lying in the electronic cash ledger. The dispute relates to the direct adjustment of the refund amount in 2020 by an adjudication order, which was confirmed by the appellate order in 2021.

The taxpayer's challenge proceeded on three grounds. First, that interest cannot be recovered from refund without issuance of a show cause notice. Second, that interest on delayed payment of tax is to be computed on net tax liability. Third, that mere reflection of credit does not amount to availment or utilisation unless the credit actually reduces tax liability.

The first appellate authority rejected these contentions. According to it, the case involved excess claim of input tax credit and not delayed payment of output tax, and therefore the concept of interest on net cash liability had no application. It further took the view that excess credit reflected in the return constituted a self-assessed liability and therefore interest was automatic and recoverable without issuance of a show cause notice.

The High Court noted these findings and declined to interfere. The earlier decision in Soorajmull Bajinath (P.) Ltd. [2024-VIL-1578-BOM] was distinguished on the ground that the relief in that case was granted on consent. Further, in the present case no material was placed before the Court regarding the balance in the electronic credit ledger during the relevant period. In the absence of such material, the Court accepted the view that interest under section 50(3) read with section 42(10) was payable.

While the Court accepted the department's position on the facts placed before it, the case leaves several questions that remain somewhat unresolved. The case leaves several questions that remain somewhat unresolved. The reasoning that the liability constituted a self-assessed amount recoverable without adjudication does not entirely align with the structure of section 75(12), read with its explanation and the recovery provisions under Section 79. The taxpayer had specifically disputed the liability on the ground that there was only reflection of credit and no utilisation. Once the very basis of liability is disputed, treating the amount as a self-assessed arrear becomes difficult.

There is also the statutory context to consider. During the relevant period, interest under section 42(10) was linked to excess claim of input tax credit detected through the matching process. In practice, the matching mechanism itself was never operationalised. The difficulty becomes even more apparent where the credit involved is transitional credit, which does not readily fit within the definition of input tax credit under section 2(62) and was never part of the intended matching framework. The interest rate of 24% was specific to this category, though it was later amended retrospectively to 18%.

Subsequent legislative developments add another dimension. Both section 50(3) and Rule 88B were amended in July 2022 with retrospective effect from 1 July 2017. The amended scheme recognises that interest arises only where excess credit is both availed and utilised, and rule 88B introduces a test to determine when the amounts are considered to be utilized. However, these amendments came well after the original and appellate orders in the present matter. The factual record notes that while the petitioner asserted that the credit ledger balance had not fallen below the amount eventually reversed, no material was produced in support of this assertion. It may also be noted that in the Bombay High Court matter referred to earlier, the consent was only for taking up the matter for hearing. In that case, it was on record that the balance in the electronic credit ledger had not fallen below the relevant amount.

Further, during the relevant period until October 2022, adjustment from refund was permissible only in respect of refund of ITC, and there was no provision for adjustment from a refund of balance in the electronic cash ledger.

Another observation in the first appellate order also needs a closer look. It was noted that under Section 49 the electronic credit ledger can be used only for payment of output tax liability and therefore interest liability has to be discharged through the electronic cash ledger. While the proposition that interest must be paid in cash is correct, it is a different matter to suggest that reversal of excess credit cannot be effected through the credit ledger. The submission made by the Petitioners was that sufficient balance existed in the credit ledger and therefore there was no requirement to discharge the tax liability in cash. This submission was directed to the original tax liability and not to the mode of payment of interest. The reasoning in the order appears to have proceeded on the mode of payment of interest, whereas the contention raised was that no interest liability arose at the first place in the absence of utilisation. [2026-VIL-222-MP]

Read previous edition dated 02.03.2026

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)