M/S U B Infrastructure (Prop. Vikaram ... vs Union Of India on 22 November, 2024

Outcome**

The High Court allowed the writ petitions, setting aside the show cause notices and assessment orders passed by the respondent-authority that disallowed Input Tax Credit (ITC). The State was granted liberty to take appropriate action in accordance with the recent amendment in GST law. The Court expressly decided not to examine the constitutional validity of Section 16(4) of the CGST Act, as the controversy was resolved by a statutory amendment.

2. Core Issue

The core issue was the legality and constitutional validity of Section 16(4) of the Central Goods and Services Tax Act, 2017 (CGST Act), which imposed a time limit for claiming Input Tax Credit (ITC), leading to disallowance of ITC for taxpayers who filed their GSTR-3B returns belatedly for the financial years 2017-18 to 2020-21.

3. Key Facts

• The petitioner (M/S U B Infrastructure, and other petitioners in analogous cases) is a proprietorship firm registered under the CGST Act.
• For the financial year 2018-19 (and other relevant financial years for other petitioners), the petitioner filed GST returns in FORM GSTR-3B, along with GST liability and late fees.
• Input Tax Credit (ITC) was availed as per inward supplies.
• Respondent No. 3 issued a notice (FORM GST DRC-01A under Section 73) proposing to disallow ITC for FY 2018-19 on the ground of late filing of GSTR-3B returns.
• Despite the petitioner's reply, an order dated 13.02.2024 (under Section 74) was passed, disallowing the ITC.
• The petitioners challenged these orders, arguing the unconstitutionality and arbitrariness of Section 16(4) of the CGST Act.
• During the pendency of the petitions, the Central Government enacted Section 118 of the Finance Act, 2024, introducing new sub-sections (5) and (6) to Section 16 of the CGST Act with retrospective effect from July 1, 2017.

4. Arguments

Taxpayer (Petitioner):
1. Constitutional Challenge: Section 16(4) of the CGST Act violates Articles 14, 19(1)(g), and 300A of the Constitution of India, imposing an arbitrary and unreasonable restriction on the right to avail ITC, which accrues upon purchase.
2. Discrimination & Arbitrariness: The time limit causes loss to registered taxpayers by disallowing eligible ITC and is discriminatory, thus violating Article 14.
3. Policy Contravention: Disallowing ITC for late GSTR-3B filing goes against the Government's policy (as per the Constitution 122nd Amendment Bill, 2014) to remove the cascading effect of taxes.
4. Double Penalty: Petitioners paid late fees and interest for delayed filing; disallowing ITC amounts to penalizing them twice for the same default.
5. Conflict with other provisions: Section 16(1) and 16(2) (non-obstante clause) stipulate conditions for ITC, which the petitioner complied with. Refusal under Section 16(4) is contrary to these provisions, and Section 16(2) should have an overriding effect on Section 16(4).
6. Legitimate Expectation: Taxpayers had a legitimate expectation that the time limit for GSTR-3B would align with GSTR-3 under Section 39(1). The retrospective amendment to Rule 61(5) making GSTR-3B the return under Section 39 caused "panic" and "shocked the professional fraternity."

Revenue (Respondent):
1. Resolution by Amendment: The controversy has been resolved by the amendment in Section 16 of the GST Act through Section 118 of the Finance Act, 2024, which incorporates new sub-sections (5) and (6).
2. Precedent for Remand: Referenced a judgment of the Madurai Bench of Madras High Court (W.P. No. 20773/2023) where a similar controversy was dealt with considering the Finance Act, 2024, and the matter was remanded back to the adjudicating authority.

5. Court’s Reasoning

1. Impact of New Amendment: The Court noted that the Central Government, through Section 118 of the Finance Act, 2024, has retrospectively amended Section 16 of the CGST Act (effective from July 1, 2017) by inserting sub-sections (5) and (6).
2. Relaxation of Time Limit: Specifically, Section 16(5) addresses the core issue by stating that, "Notwithstanding anything contained in sub-section(4), in respect of an invoice or debit note for supply of goods or services or both pertaining to the Financial Years 2017-18, 2018-19, 2019-20 and 2020-21, the registered person shall be entitled to take input tax credit in any return under Section 39 which is filed up to the thirtieth day of November, 2021."
3. Arbitrariness of Original Restriction: The Court observed that the provision of Section 16(4) restricting ITC solely on the ground of late return filing was "arbitrary" because the taxpayer had already paid the tax component to the supplier. Depriving them of ITC under such circumstances was deemed unjust.
4. Overriding Effect of Section 16(2): The Court interpreted Section 16(2) (eligibility and conditions for ITC) as having a non-obstante clause, indicating a clear legislative intent that it should not be superseded by Section 16(4).
5. Double Penalty: The Court found that allowing taxpayers to file returns with late fees and interest, and then disallowing ITC for the same delayed filing, amounted to a "double penalty" which is "arbitrary and capricious," especially since the treasury is already compensated by the late fees and interest.
6. Avoidance of Constitutional Adjudication: Given the retrospective amendment in Section 16 (jettisoning the time limit condition for the relevant periods), the Court found it unnecessary to delve into the constitutional validity of Section 16(4). The legislative amendment effectively resolved the controversy.
7. Setting Aside Orders: Based on the amendment resolving the legal dispute, the Court allowed the petitions and set aside the impugned show cause notices and assessment orders, granting the State liberty to act in line with the amended law.

6. Statutory References

• Constitution of India: Articles 14, 19(1)(g), 226, 265, 300A
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 16 (Eligibility and conditions for taking ITC)
  • Section 16(1), 16(2), 16(4)
  • Section 16(5) (inserted by Finance Act, 2024)
  • Section 16(6) (inserted by Finance Act, 2024)
  • Section 29 (Cancellation of registration)
  • Section 30 (Revocation of cancellation of registration)
  • Section 39 (Furnishing of returns)
  • Section 41 (Claim of ITC and provisional ITC)
  • Section 47 (Levy of late fee)
  • Section 49 (Payment of tax, interest, penalty and other amounts)
  • Section 50 (Interest on delayed payment of tax)
  • Section 73 (Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or willful misstatement or suppression of facts)
  • Section 74 (Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or willful misstatement or suppression of facts)
  • Rule 61(5) (of CGST Rules, relating to GSTR-3B as return under Section 39, and its retrospective amendment)
• Finance Act, 2024: Section 118
• Income Tax Act, 1961
• Constitution (122nd Amendment) Bill, 2014

7. Precedents Cited

• MRF Ltd. Vs. Assistant Commissioner (Assessment) Sales Tax, 2006(206) ELT (SC) (cited by petitioner for the principle of legitimate expectation).