As I understand from your question, it is about-
A dealer registered in GST in india. He is dealing in both taxable goods and exempted goods. GST department issued notice to reverse ITC (input tax credit) on non-business transaction and on exempt supplies 17(1) (2) under rule 42 & 43. Separate accounts are maintained for taxable goods and exempted goods and detail shown in GSTR-3B. You may be concern about, how to reply the notice and is department right?
First, The GST laws specify that ITC is not available for tax paid on inputs and input services used to make exempt supplies. Exempt supplies include goods or services that are not liable to GST. If you have inadvertently claimed ITC on inputs or input services used for exempt supplies, the GST department is within its rights to demand a reversal of that credit.
The GST laws also provide for the reversal of ITC on inputs or input services used for non-business purposes. Non-business purposes refer to activities that are not related to the taxable or exempt supply of goods or services, such as personal use.
YOu need to take due care in replying the notice, some helpful points are given below:-
rocedure outlined below to respond to the notice:

1. Review the Notice: Carefully review the notice to understand the specific reasons for the demand to reverse ITC. The notice should specify the transactions or issues for which the reversal is being demanded.
2. Examine Your Records: Ensure that you have maintained separate accounts for taxable goods and exempted goods, as well as detailed records in your GSTR-3B returns. Your records should support your claims regarding the availability of ITC.
3. Respond within the Stipulated Timeframe: Notices from the GST department typically have a deadline for responding. It’s crucial to adhere to this timeline to avoid penalties or further complications.
4. Prepare a Detailed Response: Draft a detailed response that includes the following information: (a.) Explanation: Provide a clear and concise explanation of why you believe the ITC should not be reversed for the specified transactions. (b). Supporting Documentation: Attach relevant documents and records, including invoices, ledgers, and GSTR-3B details, to substantiate your claims. (c). Legal Provisions: Cite the relevant legal provisions and rules that support your position. (d). Calculations: If required, show the calculations that demonstrate that you are entitled to the claimed ITC.
5. Submit Your Response: File your response with the GST department within the stipulated timeframe. Ensure that your response is complete and well-organized. It’s advisable to do this electronically through the GST portal or any other specified mode of communication. 
6. Seek Professional Help: If you find the process complex or if you are unsure about how to respond to the notice, consider seeking professional assistance from a tax consultant or GST practitioner who can guide you through the process.
7. Keep Records: Maintain copies of all correspondence, documents, and responses related to the notice for your own records. This documentation can be valuable in case of future disputes or audits.

It’s important to engage with the GST department in a transparent and cooperative manner. If your response is accepted, the ITC reversal may be reversed, and if not, you may have the option to appeal the decision or resolve the matter through legal channels.