M/S Ekta Enterprises Trade Name (Prop. ... vs Union Of India on 22 November, 2024

1. Outcome

The High Court allowed all the writ petitions, including M/S Ekta Enterprises (W.P. No. 2133/2024). The show cause notices and assessment orders issued by the respondent authorities disallowing Input Tax Credit (ITC) for late filing of returns were set aside. The State was reserved the liberty to take appropriate action in light of the recent amendments to the GST law.

2. Core Issue

The core issue was the constitutional validity and legality of Section 16(4) of the Central Goods and Services Tax Act, 2017 (CGST Act), which imposes a time limit for claiming Input Tax Credit (ITC), leading to disallowance of ITC if returns (GSTR-3B) are filed after the prescribed due date. The petitioners challenged this provision as arbitrary, unconstitutional, and leading to double penalties.

3. Key Facts

• The petitioner (M/S Anand Steel, whose facts were taken for convenience, representing a batch of similar cases including M/S Ekta Enterprises) is a proprietorship firm registered under the CGST Act, 2017.
• For the financial year 2018-19, the petitioner filed GST returns in FORM GSTR-3B, albeit with late fees, and availed Input Tax Credit (ITC) correctly as per inward supplies.
• Respondent No. 3 issued a notice under Section 73 of the CGST Act on 27.07.2023 (FORM GST DRC-01A), proposing to disallow the ITC for 2018-19 on the ground of late filing of return in FORM GSTR-3B.
• Despite the petitioner's reply, the Assistant Commissioner of CGST passed an impugned original order dated 13.02.2024 under Section 74 of the CGST Act, disallowing the ITC.
• The petitions challenged this disallowance and sought to declare Section 16(4) as ultra vires.

4. Arguments

Taxpayer (Petitioner)

• Constitutional Violation: Section 16(4) of the CGST Act, imposing a time limit for claiming ITC, violates Articles 14 (Equality), 19(1)(g) (Right to practice any profession, or to carry on any occupation, trade or business), and 300A (Right to property) of the Constitution of India, as it imposes an arbitrary restriction on the right to avail ITC.
• Accrual of Right: ITC accrues upon the purchase of goods/services used in business (Section 16(1)). Disallowing it due to a procedural lapse under Section 16(4) is arbitrary.
• Against GST Policy: The restriction offends the objective of GST to remove the cascading effect of taxes, as outlined in the Constitution 122nd Amendment Bill, 2014.
• Double Penalty: The petitioner already paid late fees (Section 47) and interest (Section 50) for delayed filing. Disallowing ITC penalizes them twice for the same default, which is arbitrary and capricious.
• Compliance with Conditions: The petitioner fulfilled the conditions stipulated in Section 16(1) and (2) for availing ITC. Therefore, disallowance under Section 16(4) is contrary to these provisions.
• Legitimate Expectation: Taxpayers had a legitimate expectation regarding the notification of the time limit for GSTR-3B and its alignment with ITC availment. The retrospective amendment to Rule 61(5) making GSTR-3B a return under Section 39, caused panic and violated the principle of "legitimate expectation."

Revenue (Respondent)

• The controversy in the batch of writ petitions stands resolved by the amendment in Section 16 of the GST Act, introduced via Section 118 of the Finance Act, 2024, which incorporated new sub-sections (5) and (6).
• The Revenue referred to a judgment by the Madurai Bench of the Madras High Court (W.P. No. 20773/2023) where a similar controversy was dealt with, and after considering the enactment of Finance Act, 2024, the matter was remanded to the adjudicating authority for fresh consideration.

5. Court’s Reasoning

• Right to ITC: The Court acknowledged that under the GST Act, assessees are entitled to ITC on the purchase of goods and services, which reduces the amount of GST payable.
• Conflict between Section 16(2) and 16(4): The Court noted that Section 16(2) begins with a non-obstante clause, indicating its overriding effect. The Court reasoned that Section 16(4), which restricts ITC merely for late filing of returns, makes the non-obstante Section 16(2) meaningless. Fulfilling the conditions under Section 16(2) creates a right to ITC, and Section 16(2) shows clear legislative intent not to be subject to Section 16(4).
• Arbitrariness of Double Penalty: The Court found it arbitrary and capricious to disallow ITC when the taxpayer has already paid the tax component to the supplier, along with late fees and interest for delayed filing. This constitutes punishing the taxpayer twice for a single default.
• Impact of Legislative Amendment: The most crucial aspect of the Court's reasoning was the recent amendment to Section 16 of the GST Act by Section 118 of the Finance Act, 2024.
  • This amendment retrospectively inserted sub-section (5) into Section 16, explicitly allowing registered persons to take ITC for financial years 2017-18, 2018-19, 2019-20, and 2020-21, if returns under Section 39 were filed up to November 30, 2021.
  • Sub-section (6) was also inserted, dealing with ITC availment after revocation of cancellation of registration.
• Resolution by Amendment: The Court concluded that since the Central Government, through the Finance Act, 2024, had proposed to amend Section 16 by "jettisoning the condition of time limit" for specified periods, the petitions deserved to be allowed without needing to examine the constitutional validity of Section 16(4). The amendment effectively resolves the petitioners' grievance regarding the time limit for claiming ITC.

6. Statutory References

• Constitution of India: Articles 14, 19(1)(g), 300A, 265, 226.
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 16 (Eligibility and conditions for taking ITC), including sub-sections (1), (2), (4), (5) [inserted by Finance Act, 2024], and (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 input tax credit and provisional acceptance thereof)
  • 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)
• Finance Act, 2024: Section 118.
• Income Tax Act, 1961
• Rule 61(5) (of CGST Rules, 2017, implicitly referred to).
• Constitution 122nd Amendment Bill, 2014: Objects and Reasons.

7. Precedents Cited

• MRF Ltd. Vs. Assistant Commissioner (Assessment) Sales Tax [2006(206) ELT (SC)] - Cited by the petitioner on the principle of legitimate expectation.
• Madurai Bench of Madras High Court in W.P. No. 20773/2023 - Cited by the Revenue regarding similar controversies and the impact of the Finance Act, 2024 amendment.