GST Refund Cannot Be Denied for Ineligible ITC Without Proceedings Under Section 73/74: Augustan Knitwear Case
Taxonation.AI Team · 15 Sept 2026
Introduction
In an important ruling pronounced on 8 September 2026, the GST Appellate Tribunal has held that a refund claim under Section 54(3) of the CGST/KGST Act, 2017 cannot be rejected merely on the ground that the underlying Input Tax Credit (ITC) is allegedly ineligible, where the Department has not initiated proceedings under Section 73 or Section 74 to determine that such ITC was wrongly availed or utilised.
The Tribunal also found fault with a vague Show Cause Notice (SCN) that merely alleged “wrong ITC claim” without providing invoice-wise details or explaining the specific basis for treating the ITC as ineligible.
The ruling arose in the case of M/s Augustan Knitwear Pvt. Ltd., concerning an inverted duty structure refund claim.
Facts of the Case
M/s Augustan Knitwear Pvt. Ltd. is engaged in the manufacture of garments. Its inputs were taxable at 18%, whereas its outward supplies were taxable at a concessional rate of 5%. This resulted in accumulation of ITC on account of an inverted duty structure.
For the period July 2019 to September 2019, the appellant filed a refund claim under Section 54(3) of the CGST/KSGST Act read with Rule 89(5) of the CGST/KSGST Rules for ₹18,41,280.
The adjudicating authority rejected a portion of the refund claim amounting to ₹9,72,027 and sanctioned the balance ₹8,69,253.
The appellant challenged the rejection before the First Appellate Authority. The appellate authority granted partial relief of ₹2,64,860, but sustained rejection of ₹7,07,173. The matter was thereafter taken before the Tribunal.
The Core Question Before the Tribunal
The principal question of law was:
Can a refund application under Section 54(3) be rejected on the ground of ineligible ITC when there is no order under Section 73 or Section 74 determining that the ITC was wrongly availed or utilised?
The issue was particularly significant because the Department sought to question the eligibility of ITC while processing the refund claim, rather than through independent proceedings for recovery or determination of wrongly availed ITC.
Appellant's Contentions
The appellant raised several objections against the rejection of the refund.
1. SCN was vague and non-specific
The appellant argued that the SCN did not provide:
Invoice-wise details;
The nature of the alleged ineligibility;
The basis for treating the ITC as inadmissible; or
A proper computation explaining the proposed rejection.
The SCN simply alleged that the refund was inadmissible on account of a “wrong ITC claim.”
2. Adjudication order lacked proper reasoning
According to the appellant, the adjudication order also failed to provide specific findings explaining why the particular ITC was ineligible.
The order did not demonstrate how the alleged ineligible ITC formed part of the refund claim and did not provide adequate invoice-wise reasoning.
3. Appellate Authority introduced a new ground
The appellant further contended that the First Appellate Authority introduced a new ground for rejection by holding that certain inputs were not used “in the course or furtherance of business.”
According to the appellant, this reasoning was absent from both the SCN and the original adjudication order.
4. ITC eligibility cannot be reconsidered through refund proceedings
The appellant's principal legal argument was that eligibility and lawful availment of ITC are matters governed by Sections 16 and 17 of the CGST Act.
Once ITC has been availed and its eligibility has not been challenged through proceedings under Sections 73 or 74, refund proceedings under Section 54(3) should not be converted into collateral proceedings for determining the eligibility of that ITC.
The appellant also relied upon several judicial decisions, including Convergys India Pvt. Ltd., Morgan Stanley Advantage Services Ltd., ADP Pvt. Ltd., BNP Paribas India Solutions Pvt. Ltd., Capgemini Technology Services India Ltd., and Qualcomm India Pvt. Ltd.
Revenue's Arguments
The Revenue argued that the SCN had adequately informed the appellant that the refund contained ineligible ITC.
According to the Revenue, the appellant had submitted detailed invoice lists in response to the SCN and therefore understood the allegations. The Revenue also contended that invoice-wise verification had been undertaken.
The Revenue relied upon Section 54(3) and Rule 89(5) to argue that an inverted duty structure refund is restricted to eligible ITC on inputs.
It also relied upon Section 155, under which the burden of proving eligibility to ITC rests upon the person claiming the credit.
The Revenue further relied upon the Supreme Court's decision in Union of India v. VKC Footsteps India Pvt. Ltd., along with other decisions, to support the proposition that refund under the inverted duty structure is subject to statutory restrictions.
Tribunal's Findings
1. The SCN was vague
The Tribunal first examined the Show Cause Notice.
The SCN stated only:
“Ineligible refund on account of wrong ITC claim - Rs 972027.”
The Tribunal found that the notice did not provide invoice-wise details, identify the precise nature of the alleged ineligibility, or explain the basis on which the ITC was proposed to be rejected.
The Tribunal relied upon the Supreme Court's judgment in Commissioner of Central Excise, Bangalore v. Brindavan Beverages (P) Ltd.
The Supreme Court principle, as reproduced in the judgment, is that the SCN is the foundation of the Department's case and that vague allegations lacking sufficient details can deprive the taxpayer of a proper opportunity to defend itself.
The Tribunal therefore concluded that the SCN was vague and had caused prejudice to the taxpayer.
2. The Order-in-Original was also non-speaking
The Tribunal next examined the adjudication order.
The order merely stated that the taxpayer had failed to establish why the claim should not be rejected and described the disputed amount as ITC relating to capital goods, input services and ITC from other months.
However, the Tribunal found that there was no specific and reasoned finding explaining why the particular ITC was ineligible.
The Tribunal observed that where a refund authority proposes to reject a portion of the refund claim, it must record a specific and reasoned finding explaining the basis of the rejection.
3. Appellate Authority could not introduce a new ground
The Tribunal also examined the reasoning adopted by the First Appellate Authority.
The appellate authority had considered whether the invoices related to inputs or input services used in furtherance of business and held that certain supplies were not related to the furtherance of business under Sections 2(59) and 2(60).
However, the Tribunal noted that this was not the ground set out in the original SCN.
Accordingly, the Tribunal held that the Appellate Authority had travelled beyond the boundaries of the SCN by introducing a new ground for rejection.
The Tribunal held that such an approach was contrary to the principles of natural justice.
Key Legal Finding: ITC Eligibility Must Be Determined Under Section 73/74
The most significant aspect of the judgment concerns the relationship between ITC eligibility proceedings and refund proceedings.
The Tribunal held that determination of whether ITC is eligible or otherwise is permissible under the statutory mechanism contained in Sections 73/74.
According to the Tribunal, until an order is passed under Section 73/74 disallowing the ITC, the ITC cannot simply be treated as ineligible while processing a refund application.
The Tribunal therefore held that where the Revenue has not challenged the eligibility of ITC under Sections 73/74, it cannot deny the refund merely by subsequently treating that ITC as ineligible during refund proceedings.
Importance of Circular No. 125/44/2019-GST
The Tribunal placed considerable reliance on Circular No. 125/44/2019-GST dated 18 November 2019.
Paragraph 20 of the Circular specifically contemplates a situation where a refund claim is proposed to be rejected because the underlying ITC is allegedly ineligible.
The Circular provides that the proper officer should issue an SCN in FORM GST RFD-08 under Section 54 read with Section 73 or 74, requiring the applicant to explain why:
The refund corresponding to the ineligible ITC should not be rejected; and
The allegedly ineligible ITC should not be recovered as wrongly availed ITC under Section 73 or 74, along with applicable interest and penalty, if any.
The Tribunal considered this mechanism to be consistent with the distinction between determination of ITC eligibility and processing of refund.
Reliance on Earlier Judicial Decisions
The Tribunal also relied upon decisions rendered under the erstwhile CENVAT regime, particularly:
Commissioner of Service Tax, Delhi v. Convergys India (P.) Ltd.
Morgan Stanley Advantage Services Ltd. v. Commissioner of Service Tax
ADP Pvt. Ltd. v. Commissioner of Service Tax
CCE Hyderabad IV v. Qualcomm India Pvt. Ltd.
The common principle emerging from these decisions, as adopted by the Tribunal, is that credit eligibility and refund of accumulated credit are distinct legal issues.
The Department cannot question the eligibility of credit for the first time merely because the assessee subsequently seeks refund of accumulated credit, without following the statutory mechanism for determination and recovery of wrongly availed credit.
Tribunal's Final Decision
The Tribunal ultimately summarized its findings on two important aspects.
On Natural Justice
The SCN was found to be vague and lacking sufficient details. It did not adequately communicate the allegations to the taxpayer.
The Tribunal also held that the Appellate Authority had travelled beyond the SCN by introducing grounds that were not contained in the original proceedings.
On ITC Eligibility and Refund
The Tribunal held that:
An application for refund under Section 54(3) of the CGST/KGST Act cannot be rejected on the ground of ineligible ITC in the absence of an order under Section 73/74 determining that the ITC was wrongly availed or utilised.
Since the Revenue had not undertaken proceedings under Section 73/74 to determine the correctness of the ITC, the Tribunal held that raising the issue of ITC ineligibility only at the refund stage was impermissible.
Consequently, the appeal was allowed, and the denial of refund amounting to ₹7,07,173 was set aside with consequential relief.
GST Case Law Augustan Textile Colours (Unit Of Augustan Knitwear Pvt Ltd) Versus The Commissioner Of State Tax
Citation-2026 TAXONATION 2402 (GSTAT ERNAKULAM)
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