Rule 36(4) CGST: Circular on provisional ITC unenforceable; recovery quashed and refund with 6% interest ordered

HC held that Rule 36(4) CGST Rules, 2017 is complete in itself and that its first proviso, applicable for February 2020 to August 2020, relaxes the 10% cap on provisional ITC by allowing cumulative computation for that period. The Court ruled that Circular dated 11.11.2019, being contrary to the proviso, remained unenforceable for those months and could not restrict ITC eligibility by reference to suppliers' GSTR-1 filing dates. Finding the revenue's reliance on the Circular and consequent denial/recovery of ITC to be illegal, HC quashed the impugned order and directed refund of the recovered amount with 6% interest to the petitioner.

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Issues Involved:
1. Primary Relief Against Order Dated 7.4.2021
2. Recovery of Disputed Amount During Pendency of Writ Petition
3. Interpretation of Rule 36(4) and First Proviso of CGST Rules, 2017
4. Validity and Applicability of Circular No. 123/42/219-GST

Summary:

1. Primary Relief Against Order Dated 7.4.2021
The petitioner challenged the order dated 7.4.2021 passed by the Deputy Commissioner, which directed the reversal of excess Input Tax Credit (ITC) amounting to Rs. 110,06,90,100.31 for the period February 2020 to August 2020. This was construed as a violation of Rule 36(4) of the CGST Rules, 2017, leading to a total demand of Rs. 235.52 crores, including interest and penalty. The petitioner had provisionally deposited Rs. 11,00,69,010/- against the disputed demand but disputed the entire liability.

2. Recovery of Disputed Amount During Pendency of Writ Petition
Despite the stay application pending, the respondents recovered the entire tax amount and penalty, excluding interest, totaling Rs. 220,13,80,200.60. The court noted that there is no implied stay of recovery unless granted by the court, and the revenue authorities were not in error for recovering the disputed amount during the pendency of the writ petition. However, it was unacceptable that the authorities recovered 110% of the disputed amount without accounting for the pre-deposited amount.

3. Interpretation of Rule 36(4) and First Proviso of CGST Rules, 2017
The primary issue was the interpretation of the first proviso to Rule 36(4) of the CGST Rules, 2017. The court held that the cumulative adjustment of ITC for the months February 2020 to August 2020 should be considered as a single tax period for the purpose of filing the return for September 2020. The court rejected the revenue's contention that the ITC should be computed on a month-to-month basis and emphasized that the proviso allowed for a cumulative adjustment to be made in the return for September 2020.

4. Validity and Applicability of Circular No. 123/42/219-GST
The court found that the reliance on Circular No. 123/42/219-GST dated 11.11.2019 by the revenue authorities was misplaced. The circular, being an administrative instruction, could not override the statutory law introduced by the first proviso to Rule 36(4). The court held that the circular lost its enforceability for the period February 2020 to August 2020 due to the statutory intervention made by the first proviso to Rule 36(4).

Conclusion:
The impugned order was quashed, and the court directed the refund of the entire amount recovered within six weeks, along with interest at 6% on the excess recovery of Rs. 11,00,69,010/-. The court also left it open for the respondent State to recover up to 10% of the interest amount from the erring officers. The writ petition was allowed with no order as to costs.

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