MP HC strikes down CGST Act Section 16(4) time limit for Input Tax Credit claims as unconstitutional

The MP HC struck down the time limit for claiming Input Tax Credit (ITC) under Section 16(4) of the CGST Act, ruling it violates Article 14 of the Constitution. The court held that restricting ITC claims solely because returns were filed after prescribed dates is arbitrary, as taxpayers already paid tax to suppliers including the tax component. The provision creates double punishment - taxpayers pay late fees and interest for delayed filing, then lose ITC entitlement, effectively paying tax twice for the same default. The court noted that without provisions for revised returns, taxpayers exercise caution in filing March returns to avoid mismatches. Since the Central Government proposed amendments removing time limits through the 2024 Act, the court allowed petitions without examining constitutional validity. The treasury receives adequate compensation through late fees and interest payments.

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Issues Involved:

1. Imposition of time limit for claiming Input Tax Credit (ITC) under Section 16(4) of the CGST Act.
2. Alleged violation of constitutional provisions due to Section 16(4).
3. Impact of retrospective amendment to Section 16 by the Finance Act, 2024.
4. Legitimacy of penalties imposed for late filing of GST returns.

Issue-wise Detailed Analysis:

1. Imposition of Time Limit for Claiming ITC Under Section 16(4) of the CGST Act:

The primary issue revolves around the imposition of a time limit for claiming Input Tax Credit (ITC) as stipulated in Section 16(4) of the CGST Act. The petitioner argued that the restriction imposed by Section 16(4) is arbitrary, as it disallows ITC claims due to procedural lapses, despite the taxpayer having fulfilled all other conditions for availing ITC as per Section 16(1) and 16(2). The court acknowledged that the existing regime under Section 16(4) restricts the claim of ITC if the return is filed after the prescribed date, which is deemed arbitrary since the taxpayer has already paid the tax to the supplier. The court noted that this provision could potentially override the scheme of the statute, making the non-obstante Section 16(2) meaningless.

2. Alleged Violation of Constitutional Provisions Due to Section 16(4):

The petitioner contended that Section 16(4) violates Articles 14, 19(1)(g), and 300A of the Constitution of India by imposing arbitrary restrictions on the right to avail ITC. The petitioner argued that the accrual of ITC is a right that arises as soon as goods or services are purchased for business purposes, and disallowing it due to procedural delays is unjust. The court considered these arguments and recognized that the imposition of a time limit through Section 16(4) could be seen as arbitrary and capricious, especially when the taxpayer has already compensated the treasury through late fees and interest payments.

3. Impact of Retrospective Amendment to Section 16 by the Finance Act, 2024:

The court took note of the retrospective amendment to Section 16 by the Finance Act, 2024, which introduced sub-sections (5) and (6) to address the issues surrounding the time limit for availing ITC. The amendment allows for ITC claims for specific financial years to be made up until November 30, 2021, and provides provisions for cases where registration is canceled and subsequently revoked. The court observed that this amendment effectively resolves the controversy by eliminating the time limit condition, thus rendering the petitions moot without needing to examine the constitutional validity of Section 16(4).

4. Legitimacy of Penalties Imposed for Late Filing of GST Returns:

The petitioner argued that the imposition of penalties for late filing of GST returns, alongside the disallowance of ITC, amounts to double punishment. The court acknowledged that taxpayers often pay late fees and interest as deterrents for delayed filings, and disallowing ITC on top of these penalties is excessive. The court found that the punitive measures, when combined with the disallowance of ITC, are disproportionate and unfair.

Conclusion:

In conclusion, the court allowed the batch of petitions, setting aside the show cause notices and assessment orders issued by the respondent. The court recognized the retrospective amendment to Section 16 by the Finance Act, 2024, as a resolution to the issues raised, thus obviating the need for a constitutional examination of Section 16(4). The court reserved the liberty for the State to take appropriate action in light of the amendment to the GST law. The petitions were disposed of accordingly.

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