Facts of the case:

In this case, the appellant, engaged in operating the e-commerce was registered under the erstwhile Service Tax and VAT laws and had accumulated CENVAT credit and VAT input tax credit prior to the introduction of GST. Upon implementation of GST from 1 July 2017, the appellant transitioned such credits into the GST regime by filing Form GST TRAN-1 under Section 140 of the CGST Act.

The transitional credit comprised CENVAT credit of service tax amounting to approximately ₹31.84 crore, Krishi Kalyan Cess (KKC) credit of ₹74.67 lakh, and VAT credit on stock-in-trade of ₹22.14 lakh. The credit balances were duly reflected in the returns filed under the erstwhile laws and had never been disputed by the Revenue during the pre-GST regime.

Subsequently, a Show Cause Notice was issued under Section 74 of the CGST Act alleging wrongful transition of credit on the ground that the appellant failed to substantiate the eligibility of the credits with supporting documents such as invoices, credit registers, payment proofs, and other records. The adjudicating authority and the first appellate authority confirmed the demand, interest, and equivalent penalty. Aggrieved by the said orders, the appellant approached the GST Appellate Tribunal.

Issue:

Whether proceedings under Section 74 of the CGST Act could be invoked to deny transitional credit that had accrued under the erstwhile indirect tax laws and had remained undisputed at the time of availment. whether GST authorities possessed the jurisdiction to verify the eligibility of pre-GST CENVAT credit by calling for invoices and records years after the credit had been validly reflected in service tax and VAT returns. Whether transitional credit of Krishi Kalyan Cess could be denied under Section 140 of the CGST Act in light of the amendments introduced by the CGST (Amendment) Act, 2018 and the judicial pronouncements on the subject.

Also, whether VAT credit transitioned under Section 140(6) could be disallowed without any specific findings regarding its ineligibility and whether the invocation of Section 74 and imposition of 100% penalty were legally sustainable.

Held That:

The Tribunal allowed the appeal and set aside the entire demand, interest, and penalty.

The Tribunal held that the impugned proceedings were initiated under Section 74 of the CGST Act for questioning the eligibility of credits that had originally accrued under the pre-GST regime. Such an exercise was beyond the jurisdiction of GST authorities. If the Revenue intended to dispute the admissibility of CENVAT credit availed under the Finance Act, 1994 or the CENVAT Credit Rules, 2004, proceedings could only be initiated under the provisions of the erstwhile laws by virtue of Sections 142 and 174 of the CGST Act.

Relying extensively on the judgments of the Jharkhand High Court in Usha Martin Limited and Steel Authority of India Limited, as well as the Calcutta High Court in Kunjal Synergies Pvt. Ltd., the Tribunal observed that GST authorities cannot reassess the correctness of CENVAT credit availed under the repealed laws merely because such credit was transitioned through TRAN-1.

The Tribunal further held that the transitional credit carried forward under Section 140(1) represented the closing balance appearing in the last return filed under the erstwhile law. Such balance is a composite figure derived from opening balances, availment, and utilization over a period of time and therefore cannot be linked to specific invoices for verification at the stage of transition. Consequently, denial of credit on the basis of non-production of invoices, credit registers, payment vouchers, or alleged discrepancies in individual documents was legally unsustainable.

On the issue of Krishi Kalyan Cess, the Tribunal followed the Bombay High Court decision in Godrej & Boyce Manufacturing Co. Ltd., holding that denial of transitioned KKC credit was not permissible. The Tribunal observed that Explanation 3 to Section 140 could not be pressed into service in the absence of operationalization of the corresponding amendments to Explanations 1 and 2. The Tribunal also relied upon CBIC Circular No. 87/06/2019-GST dated 02.01.2019 and held that the Revenue’s challenge before the Supreme Court did not dilute the binding effect of the Bombay High Court judgment, especially in the absence of any stay.

Regarding VAT credit transitioned under Section 140(6), the Tribunal found that the appellant had furnished all necessary details relating to stock-in-trade and the authorities had not recorded any specific finding establishing ineligibility. Therefore, denial of such credit was held to be arbitrary and unsustainable.

The Tribunal also held that invocation of Section 74 and imposition of 100% penalty were wholly unjustified since the entire transition was made through statutory declarations in TRAN-1 and there was no suppression, fraud, or wilful misstatement on the part of the appellant.

Accordingly, the Tribunal set aside the impugned order and allowed the appeal with consequential relief.

Case Name: Tata Unistore Limited Versus Commissioner CGST & Ex. Navi Mumbai Commissionerate. dated 31.07.2026

Citation No. 2026 Taxo.online 2189