Salahudheen vs State Tax Officer on 4 June, 2024

1. Outcome

• The challenge to the constitutional validity of Sections 16(2)(c) and 16(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) and the State Goods and Services Tax Act, 2017 (SGST Act) was rejected.
• Petitioners who can claim the benefit of Circular No. 183/15/2022-GST dated 27.12.2022 and Circular No. 193/05/2023-GST dated 17.07.2023 are granted liberty to make their claims before the appropriate authority within one month. The authorities shall examine and process these claims.
• The time limit for furnishing the return for the month of September under Section 16(4) is to be treated as 30th November (instead of the earlier 30th September/20th October) for each financial year, with retrospective effect from 01.07.2017 till 30.11.2022. Claims for Input Tax Credit (ITC) filed within this extended period are to be processed if the dealer is otherwise eligible.
• The writ petitions were disposed of.

2. Core Issue

The core issue before the High Court was the constitutional validity of Sections 16(2)(c) and 16(4) of the CGST/SGST Act, 2017, specifically:
* Whether these sections infringe upon the constitutional provisions, particularly Articles 14, 19(1)(g), and 300A of the Constitution of India.
* The nature of the claim to Input Tax Credit (ITC) under the GST regime (i.e., whether it is an absolute right or a concession subject to conditions).

3. Key Facts

• The Goods and Services Tax (GST) regime was implemented in India from 01.07.2017, aiming for "One India, One Market, One Tax" to avoid cascading tax effects through a seamless Input Tax Credit (ITC) mechanism.
• Section 16(2)(c) of the CGST/SGST Act mandates that for a registered person to be eligible for ITC, the tax charged on the supply must have been actually paid to the Government by the supplier.
• Section 16(4) of the CGST/SGST Act imposes a time limit for availing ITC, originally set as the due date for furnishing the return under Section 39 for the month of September following the end of the financial year to which the invoice/debit note pertains, or the furnishing of the relevant annual return, whichever is earlier. This date was later amended to 30th November.
• Petitioners, registered dealers, were denied ITC for various reasons, including:
  • Suppliers remitting tax but details not reflecting in GSTR-1/GSTR-2A due to technical issues.
  • Suppliers collecting tax from petitioners but failing to remit it to the Government.
  • Delay in filing returns for the relevant period beyond the statutory deadline.
• GSTR-2A is an auto-populated, read-only document, and petitioners argued they had no control over suppliers' filings.
• The Central Board of Indirect Taxes and Customs (CBIC) issued Circular Nos. 183/15/2022-GST and 193/05/2023-GST to address difficulties in claiming ITC due to mismatches or non-filings during the initial periods of GST implementation (up to 01.01.2022).

4. Arguments (Taxpayer vs Revenue)

Taxpayer (Petitioners):
* Unconstitutionality of Sections 16(2)(c) & 16(4): Argued these sections violate Articles 14 (arbitrary, treats bona fide and fraudulent purchasers alike), 19(1)(g) (imposes unreasonable and onerous conditions affecting trade), and 300A (ITC is a vested right/property).
* "Lex non cogit ad impossibilia": It is impossible for the recipient to ensure the supplier deposits the collected tax, and the recipient should not be penalized for the supplier's default.
* Double Taxation/Unjust Enrichment: Denial of ITC leads to double taxation if the recipient has paid the tax to the supplier, and the government later recovers it from the defaulting supplier.
* GSTR-2A/3B Mismatch: GSTR-2A is merely a facilitator; discrepancies should not override the entitlement to ITC based on valid documents and self-assessment.
* Substantive Right vs. Procedural Lapse: ITC is a fundamental right under GST; procedural delays (like late filing of returns) should not extinguish this right, especially when accompanied by late fees.
* Retrospective Application of Amendment: The amendment to Section 16(4) extending the deadline to 30th November is procedural and should apply retrospectively from 01.07.2017, considering initial GST implementation challenges.

Revenue (Respondents):
* ITC as a Concession: ITC is not an absolute right but a statutory concession/entitlement subject to strict conditions and restrictions prescribed by the Act.
* Integrity of GST Scheme: Sections 16(2)(c) and 16(4) are crucial for the integrity of the GST structure, especially for revenue collection, budgetary allocation, and the IGST mechanism where credits cross state borders. Without 16(2)(c), originating states would have to transfer funds (as part of IGST) they never received.
* Self-Policing Mechanism: These provisions act as a self-monitoring and self-policing mechanism, incentivizing recipients to ensure compliance by their suppliers.
* Constitutional Validity: The sections are reasonable and apply universally, hence not violating Articles 14 or 19(1)(g). Incidental disadvantages to some taxpayers are inherent in taxing statutes.
* Time Limits are Necessary: Time limits for availing ITC are common in tax laws (e.g., VAT, CENVAT) and are necessary for governmental fiscal planning and certainty. GST provides a more extended period than previous regimes.
* Burden of Proof: Section 155 places the burden of proving the ITC claim on the registered person.
* Remedy Against Supplier: If a supplier defaults, the purchaser's remedy lies against the supplier, not in claiming unearned ITC from the government.
* High Court Precedents: Constitutional validity of Section 16(4) has been upheld by other High Courts.
* Initial Difficulties Addressed: Circulars have been issued to address bona fide cases of mismatches and non-filing during the initial years of GST.

5. Court’s Reasoning

• Constitutional Validity of Taxing Statutes (Issue I): The Court affirmed that taxing statutes can be challenged if they lack legislative competence, are not for public purpose, or violate fundamental rights (e.g., manifest arbitrariness under Article 14). However, the legislature enjoys wide discretion in taxation, and courts generally do not interfere with policy matters. GST legislation is competent under Article 246A.
• Nature of Input Tax Credit (Issue II): The Court unequivocally held that ITC is a concession or entitlement, not an absolute or vested right. It is subject to conditions and restrictions laid down in the statute. This was supported by Supreme Court precedents (e.g., Godrej & Boyce Mfg. Co.(P) Ltd., India Agencies (Regd.), Jayam & Co., ALD Automotive (P) Limited, Union of India V. VKC Footsteps (India) (P) Ltd.).
• Challenge to Section 16(2)(c) and 16(4) (Issue III):
  • Section 16(2)(c): The Court found this section crucial for the workability of the GST framework, especially the IGST mechanism. If a supplier defaults, allowing ITC to the recipient without the tax being actually paid to the government would force the originating State to transfer funds it never received, thus destabilizing the entire system and causing substantial revenue loss. The provision is deemed a necessary safeguard and not onerous or unconstitutional. The argument of "lex non cogit ad impossibilia" was rejected, with the Court stating that recovery actions against defaulters are separate from the conditions for granting ITC, which requires tax to be in the treasury. It relied on Mahalaxmi Cotton Ginning Pressing and Aastha Enterprises.
  • Section 16(4): The Court upheld the time limit, emphasizing that allowing ITC claims to linger indefinitely would severely impact revenue collection, budgetary allocations, and fiscal stability. Time limits for ITC are a standard feature in tax laws, and the GST regime provides a reasonable period. The Court clarified that Section 16(2) (eligibility restrictions) and Section 16(4) (time restrictions) operate independently and are not contradictory. It cited Willowood Chemicals, Thirumalakonda Plywoods, and Gobinda Construction which have upheld similar provisions. Claims of Article 14 violation were dismissed, as the conditions apply universally, and any incidental disadvantage is inherent in a taxing statute.
  • Retrospective Effect for Section 16(4) Amendment: Acknowledging the initial difficulties in GST implementation, the Court directed that the amendment to Section 16(4) changing the September deadline to 30th November for furnishing returns for the month of September should be given retrospective effect from 01.07.2017 to 30.11.2022. This procedural change aims to ease compliance for taxpayers who filed their September returns by 30th November during this period.
• Relief through Circulars: The Court recognized that CBIC Circulars 183/15/2022-GST and 193/05/2023-GST specifically address bona fide ITC claims where GSTR-2A was not available or mismatches occurred in the early years of GST (up to 01.01.2022). Petitioners were given a one-month window to avail benefits under these circulars.

6. Statutory References

• Central Goods and Services Tax Act, 2017 (CGST Act) / State Goods and Services Tax Act, 2017 (SGST Act): Sections 12, 13, 15, 16, 16(1), 16(2), 16(2)(a), 16(2)(aa), 16(2)(b), 16(2)(ba), 16(2)(c), 16(2)(d), 16(3), 16(4), 31, 34, 37, 37(1), 38, 39, 39(1), 39(6), 41, 41(1), 41(2), 43, 43A, 44, 47, 49, 49(2), 49(4), 50, 53, 54, 54(3), 59, 61, 73, 74, 155, 2(46), 2(59), Chapter VI, Chapter IX.
• Central Goods and Services Tax Rules, 2017 (CGST Rules): Rule 36, 36(1), 36(2), 36(3), 36(4), 54(1), 59 (FORM GSTR-1), 60(7) (FORM GSTR-2B), 61, 61(5).
• Constitution of India: Articles 14, 19, 19(1)(g), 31(1), 300A, 246, 246A, 254, 265, 279A, 279A(5), 279A(6), 286, 366(12A), 366(26A), Part III.
• Other Acts/Rules: Constitution (101st Amendment) Act, 2016; Finance Act, 2022 (Act 6 of 2022, Section 100); Customs Act, 1962; Income Tax Act, 1961; Integrated Goods and Services Tax Act; Union Territory Goods and Services Tax Act; Goods and Services Tax (Compensation to States) Act; Cenvat Credit Rules, 2004 (Rule 4, 117, 117(1)); Bombay Sales Tax Rules, 1959 (Rules 41, 41A); Central Sales Tax (Karnataka) Rules, 1957 (Rule 6(b)(ii)); Central Sales Tax Act, 1956 (Sections 8(1), 8(4), 8(8), 13, 13(1), 13(3)-(5)); Tamil Nadu Value Added Tax Act, 2006 (Sections 3(2), 3(3), 19, 19(11), 19(20)); Maharashtra Value Added Tax Act, 2002 (Sections 48, 48(5)); Madhya Pradesh General Sales Tax Act, 1958; Entry Tax Act.
• Circulars: Circular No. 183/15/2022-GST dated 27.12.2022; Circular No. 193/05/2023-GST dated 17.07.2023; CBIC Press Release dated 18.10.2018.

7. Precedents Cited

1. Godrej & Boyce Mfg. Co.(P) Ltd. & others V. CST & others [(1992) 3 SCC 624]
2. Mahalaxmi Cotton Ginning Pressing & Oil Industries v. State of Maharashtra [2012 SCC OnLine Bom 733]
3. Union of India & others V. VKC Footsteps (India) (P) Ltd. [(2022) 2 SCC 603]
4. Astha Enterprises v. The State of Bihar [CWC No. 10395 of 2023] / Aastha Enterprises v. State of Bihar & others [MANU/BH/1034/2023]
5. State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd. [2023 SCC OnLine SC 248]
6. Nahasshukoor v. Assistant Commissioner [WA. No.1853 of 2023:2023: KER: 69725]
7. State of Himachal Pradesh v. Goel Bus Service [2023 SCC OnLine SC 46]
8. Sharaya Bano & others v. Union of India [(2017) 9 SCC 1]
9. Gobinda Construction & others v. Union of India & others [CWC No. 9108 of 2021]
10. Thirumalakonda Plywoods v. Assistant Commissioner of State tax [2023 SCC OnLine AP 1476]
11. Khandige Sham Bhat v. AITO [AIR 1963 SC 591]
12. State of Bihar and others v. Bihar Pensioners Samaj [(2006) 5 SCC 65]
13. Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay [AIR 1972 SC 845]
14. Raja Jagannath v. U. P. [1963 (1) SCR 220: (AIR 1962 SC 1563)]
15. East India Tobacco Co. v. Andhra Pradesh [1963 (1) SCR 404: (AIR 1962 SC 1733)]
16. State of Andhra Pradesh v. Nalla Raja Reddy [1967 (3) SCR 28: (AIR 1967 SC 1458)]
17. Ravi Varma v. Union of India [1969 (3) SCR 827: (AIR 1969 SC 1094)]
18. Twyford Tea Co. Ltd. v. State of Kerala [1970 (3) SCR 383: (AIR 1970 SC 1133)]
19. State of West Bengal v Kesoram Industries Limited & others [(2000) 1 SCC 710]
20. Yadlapati Venkateswarlu v. State of Andhra Pradesh & another [1992 Supp (1) SCC 74]
21. Smt Ujjam Bai v. State of Uttar Pradesh [1962 AIR 1621]
22. State of Karnataka v. M/s. M K Agro Tech Private Limited [(2017) 16 SCC 210]
23. India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes [(2005) 2 SCC 129]
24. Jayam & Co. v. Assistant Commissioner & Another [(2016) 15 SCC 125]
25. ALD Automotive (P) Limited v. Commercial Tax Officer [(2019) 13 SCC 225]
26. Willowood Chemicals v Union of India [2018 (58) GSTR 310 (Guj)]
27. Union of India v. Bharti Airtel and others [(2022) 4 SCC 328]
28. Reserve Bank of India v. Peerless General Finance and Investments Co. Ltd & Others [(1987) 1 SCC 424]
29. R.S. Raghunath's case (not fully cited in text)
30. Jilubhai Nanbhai Khachar (not fully cited in text)
31. State of Madhya Pradesh vs. Indore Iron and Steel Mills Pvt. Ltd. [MANU/SC/0637/1998: AIR 1998 SC 3050]