ITC should not be restricted due to time Limitation: Section 16(4) is arbitrary and capricious

Background

The petitioner, a proprietorship firm registered under the CGST Act, 2017, challenged the order dated 27.07.2023.

The petitioner filed GST returns for FY 2018-19, including GSTR-3B for April 2018 to March 2019, along with applicable GST liability and late fees. However, department issued a notice under Section 73 of the CGST Act proposing to disallow ITC for the tax period 2018-19 due to late filing of returns. The Assistant Commissioner passed the impugned order under Section 74, disallowing ITC, despite the petitioner’s compliance with tax and late fee payments

Grounds of Challenge by the Petitioner

The petitioner raised several substantive legal and constitutional grounds against the impugned order. The key arguments are as follows:

1. Violation of Fundamental Rights

   The petitioner contended that the imposition of a time limit under Section 16(4) of the CGST Act for claiming ITC infringes upon fundamental rights guaranteed under:

   • Article 14: The restriction was described as arbitrary and discriminatory.

   • Article 19(1)(g): The time limit was argued to be an unreasonable restriction on the right to carry out trade and business.

   • Article 300A: It was claimed that the limitation on ITC amounts to deprivation of property without due process.

     
     

2. Arbitrary Restrictions on ITC

   • The petitioner argued that ITC accrues as a substantive right when goods or services are purchased for business purposes under Section 16(1) of the CGST Act.

   • Disallowing this right due to procedural lapses under Section 16(4) was described as arbitrary, irrational, and a violation of the principle of fairness.

     
     

3. Contradiction with GST Objectives

   The petitioner highlighted that GST's very purpose was to eliminate the cascading effect of taxes. Disallowing ITC on procedural grounds contradicts the objectives of the 122nd Constitutional Amendment Bill, 2014.

   
   

4. Double Penalty

   It was pointed out that the petitioner had already paid late fees and interest for the delayed filing of returns. Denying ITC for the same default amounted to penalizing the petitioner twice.

   
   

5. Legislative Ambiguity and Retrospective Amendment

   The retrospective amendment to Rule 61(5), which declared GSTR-3B as a return under Section 39, was claimed to create confusion among taxpayers. The petitioner argued that this change violated the principle of legitimate expectation as taxpayers expected fair treatment from the government.

Arguments by Respondent No. 5 (State)

The Additional Advocate General (AAG) for the respondent submitted that the issues raised in these petitions have been resolved through legislative amendments. Specifically:

1. Finance Act, 2024:

   Section 118 of the Finance Act, 2024, introduced sub-sections (5) and (6) to Section 16 of the CGST Act, clarifying the ITC claim process and addressing concerns over time limits.

   
   

2. Judicial Precedent:

   Reference was made to a judgment by the Madurai Bench of the Madras High Court in W.P. No. 20773/2023, which dealt with similar issues. In that case, the court set aside the impugned orders and remanded the matters back to the adjudicating authority for fresh consideration under the amended law.

Analysis by the Court

After hearing both parties, the court examined the merits of the case in light of the amended provisions of the CGST Act. The following points were noted:

1. Nature of ITC and Legislative Scheme

• ITC is a crucial feature of the GST system, allowing taxpayers to reduce their tax liability. Section 16(2) of the CGST Act establishes clear conditions for availing ITC, which the petitioner had fulfilled.

• However, the restrictive provision under Section 16(4) contradicted the broader scheme of the Act and undermined the taxpayer’s rights.

  
  

2. Double Penalty and Lack of Revised Return Mechanism

• Denying ITC despite the payment of late fees and interest was found to be excessive and punitive.

• The court also observed that the GST framework lacks provisions for filing revised returns, creating undue hardship for taxpayers.

  
  

3. Legislative Relief Through Finance Act, 2024

• The amendment introduced by Section 118 of the Finance Act, 2024, provides retrospective relief to taxpayers by allowing ITC claims for past periods.

  
  

Court’s Decision and Directions

In view of the legislative amendments and the submissions made, the court issued the following orders:

1. The impugned show-cause notices and assessment orders issued by Respondent No. 3 in all petitions are set aside.

2. The State is granted liberty to initiate appropriate action in accordance with the amended GST law.

Finance Act 2024 has already introduced an amnesty by adding section 16(5) to the act which provides that Input tax credit for the invoices and debit notes pertaining to financial years 2017-18, 2018-19, 2019-20, 2020-21, shall be allowed if it is claimed in any return filed upto 30th November 2021.

However, this amnesty does not apply to the period after 2020-21. Therefore this judgement can prove to be beneficial for taxpayers, whose ITC is being denied for late filing of return even after paying interest and late fees

Anand Steel v. Union of India by the Honourable Madhya Pradesh High Court