Madras HC Sets Aside Tax and Interest on Unutilised ITC Reflected in GSTR-2A/2B

Background of the GST dispute

G.R. Organic Company was engaged in making 100% exempt supplies during FY 2021-22. Because purchases were made from registered suppliers, input tax credit automatically appeared in the company's GSTR-2A and GSTR-2B statements.

The GST department initiated proceedings based on the reflected credit and passed an order in Form GST DRC-07 on 25 November 2025. The order imposed tax on the amount shown as ITC and also levied interest.

The taxpayer challenged the order before the Madras High Court. The writ petition also referred to bank attachment proceedings initiated through Form GST DRC-13.

Taxpayer's explanation before the High Court

The taxpayer submitted that it was fully aware that credit relating to exempt supplies was not available for utilisation. For that reason, the ITC reflected in the auto-populated statements had never been used to offset any outward tax liability.

It further stated that the reflected credit had been reversed on 7 March 2026.

The taxpayer therefore argued that the department could not demand tax and interest merely because supplier-reported transactions caused the amount to appear in GSTR-2A/2B.

Department accepted that ITC was not utilised

The Government Counsel obtained written instructions and informed the Court that the taxpayer had not utilised the ITC.

The department nevertheless submitted that the ineligible credit should have been reversed at the appropriate time.

This distinction became central to the decision. The issue was not whether the taxpayer was entitled to retain credit relating to exempt supplies. The question was whether tax and interest could be imposed when the reflected credit had never been used.

Automatic reflection is different from utilisation

GSTR-2A and GSTR-2B are generated from information reported by suppliers. Eligible or ineligible credit may therefore appear in these statements without any positive act of utilisation by the recipient.

A credit appearing in an auto-populated statement is not necessarily the same as credit used through the electronic credit ledger to pay output tax.

The High Court focused on the admitted factual position that the taxpayer had not used the amount to offset outward tax liability. Mere reflection did not justify the tax and interest imposed by the impugned order.

Madras High Court's ruling

The Court held that the imposition of tax and interest was unsustainable because the ITC had not been used to discharge outward tax liability.

It consequently set aside the Form GST DRC-07 order dated 25 November 2025.

At the same time, the Court left it open to the department to initiate action if the ITC had not actually been reversed. The relief therefore rested on non-utilisation and the stated reversal, not on a finding that credit on exempt supplies was eligible.

What the judgment does not decide

The judgment does not grant a general right to claim input tax credit relating to exempt outward supplies. The restrictions and reversal requirements under the GST law continue to apply.

It also does not say that a taxpayer may indefinitely retain ineligible credit without correction. The Court expressly preserved departmental action if the credit had not been reversed.

The ruling is confined to the unsustainability of imposing tax and interest merely on the basis of reflected but unutilised ITC in the facts presented to the Court.

Why GSTR-2A/2B alone may be insufficient for a demand

GSTR-2A and GSTR-2B show supplier-reported inward supplies and assist in credit reconciliation. They do not, by themselves, establish that the recipient actually availed and utilised every reflected amount.

Before raising a demand, the authority should examine returns, the electronic credit ledger, the electronic liability register, reversal entries and the manner in which output tax was discharged.

Where the credit has never been used, an order should not treat auto-population as equivalent to actual utilisation without examining the relevant ledger evidence.

Interest requires examination of actual tax impact

Interest under GST generally compensates for delayed payment or wrongful use of funds, depending on the applicable provision and facts.

If an ineligible credit merely appears in an auto-populated statement and is not used to pay outward tax, the department must identify the statutory and factual basis for charging interest.

The Madras High Court found that the admitted non-utilisation made the tax and interest imposed in this case unsustainable.

Documents taxpayers should preserve

• Monthly GSTR-2A and GSTR-2B downloads for the relevant period.
• Filed GSTR-3B returns showing the credit reported, reversed or not claimed.
• Electronic credit ledger and electronic liability register extracts.
• Working papers explaining ineligible ITC relating to exempt supplies.
• Reversal entries and payment references, including the date of reversal.
• Supplier invoice reconciliation and classification of exempt and taxable outward supplies.
• Replies submitted to DRC-01A, DRC-01 or other notices.
• Proof showing whether outward tax was discharged in cash or through the credit ledger.

Practical steps when ineligible ITC appears automatically

• Reconcile GSTR-2B with the purchase register every tax period.
• Identify credit attributable exclusively to exempt supplies and common credit requiring proportionate reversal.
• Do not treat auto-populated credit as automatically eligible.
• Make required reversals within the applicable time and maintain a clear audit trail.
• Check the electronic credit ledger to confirm that ineligible credit was not utilised.
• If a notice is issued, respond with ledger evidence rather than relying only on a general statement of non-utilisation.
• Explain any delayed reversal and calculate any legally applicable consequence carefully.
• Challenge an order that equates reflection with utilisation without examining the records.

Guidance for GST authorities

• Distinguish supplier-reported reflection from credit actually availed and utilised by the recipient.
• Verify GSTR-3B, electronic credit ledger entries and reversals before quantifying a demand.
• Record whether the disputed amount was used to discharge output tax.
• Apply the correct statutory provision to availment, utilisation, reversal, tax and interest.
• Avoid imposing tax and interest solely because an amount appears in GSTR-2A or GSTR-2B.
• Preserve the right to take proportionate action where reversal has not been completed.

Key takeaways

• The case number is W.P. No. 22795 of 2026.
• The order was delivered by the Madras High Court on 14 July 2026.
• The taxpayer made 100% exempt supplies during FY 2021-22.
• ITC appeared automatically in GSTR-2A/2B based on inward supplies.
• The department accepted that the taxpayer had not utilised the ITC.
• The taxpayer stated that the credit was reversed on 7 March 2026.
• The High Court set aside the tax and interest imposed through the DRC-07 order.
• The department may initiate appropriate action if the ITC was not actually reversed.

Conclusion

G.R. Organic Company v. Commercial Tax Officer draws an important line between ITC reflected in auto-populated statements and ITC actually used to pay output tax. Reflection in GSTR-2A/2B, without utilisation, could not by itself support the tax and interest demanded in this case.

The decision also underlines the need for timely reversal and strong ledger evidence. Taxpayers making exempt supplies should reconcile reflected credit, avoid its utilisation and document every reversal so that an auto-populated amount does not develop into an avoidable demand.