Rule 42 Reversal Cannot Be Dropped Without Recording Taxable and Exempt Turnover: GSTAT Lucknow

The Goods and Services Tax Appellate Tribunal, Lucknow remanded a Rule 42 credit reversal dropped by the First Appellate Authority without verification, while upholding its findings on the GSTR‑2A mismatch.

The Goods and Services Tax Appellate Tribunal (GSTAT), Lucknow has held that a First Appellate Authority cannot drop a demand for reversal of common input tax credit (ITC) under Section 17(2) read with Rule 42 without recording the taxable and exempt turnover and verifying the claimed separation of businesses [Anant Ram v. Shyam Lal Shri Narain, 2026-juristway.com-3401-GSTAT(Lucknow)-GST].

The Bench of Santosh Kumar Srivastava, Member (Judicial), and Arvind Kumar, Member (Technical) heard the Revenue’s appeal. The Kanpur trader dealt in taxable kirana and spices and in exempt papad, declaring exempt supplies of about ₹6.76 crore in its annual return. A demand of ₹97,44,759 under Section 73(9) included a Rule 42 reversal and a mismatch between Forms GSTR‑3B and GSTR‑2A. The First Appellate Authority dropped the Rule 42 demand of of about ₹47.44 lakh entirely.

Rule 42 restricts credit on inputs used partly for taxable and partly for exempt supplies, by the ratio of exempt to total turnover. The trader argued that it kept separate ledgers, invoices and stock registers, and claimed no ITC on the papad business.

The Tribunal found that the First Appellate Authority accepted that claim at face value, without recording the exempt and taxable sales or stating whether separate stock registers were physically verified. In a wholesale‑cum‑retail firm, common inputs and services were likely. The order was non‑speaking and unquantified on this point.

On the mismatch, the Tribunal upheld the relief of ₹74,325 because the trader met the requirements of Circular No. 183/15/2022‑GST, including a certificate for a supplier’s wrong GSTIN entry. The Revenue’s objection to an IGST credit of ₹59,867.50 failed, as that amount had already been disallowed.

The portion dropping the Rule 42 demand was set aside and remanded, and the mismatch findings were upheld.

2026-juristway.com-3401-GSTAT(Lucknow)-GST