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        <h1>Writ petition allowed challenging reversal of Input Tax Credit claims under Section 16(4) and 16(5) of CGST Act 2017</h1> <h3>Nilgiris Silverline Builders Private Limited Versus The Deputy State Tax Officer – 2 Office of the Deputy Commercial Tax Officer Gudalur Assessment Circle, Gudalur The Nilgiris, Uthagamandalam Coimbatore.</h3> Madras HC allowed the writ petition challenging reversal of Input Tax Credit (ITC) claims and imposition of tax, penalty and interest. Following precedent ... Reversal of ITC claim - imposition of tax, penalty and interest - HELD THAT:- The issue involved in the present Writ Petition, has been squarely covered by the common order of this Court, in SRI GANAPATHI PANDI INDUSTRIES, REP. BY ITS PROPRIETOR VERSUS THE ASSISTANT COMMISSIONER (STATE TAX) (FAC) TONDIARPET ASSESSMENT CIRCLE, CHENNAI [2024 (10) TMI 1631 - MADRAS HIGH COURT], wherein, this Court has categorically held that 'The orders impugned in all Writ Petitions are quashed insofar as it relates to the claim made by the petitioners for ITC which is barred by limitation in terms of Section 16 (4) of the CGST Act, 2017 but, within the period prescribed in terms of Section 16 (5) of the said Act'. The order impugned in all Writ Petition is quashed insofar as it relates to the claim made by the petitioner for ITC which is barred by limitation in terms of Section 16 (4) of the CGST Act, 2017 but, within the period prescribed in terms of Section 16 (5) of the said Act - petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether input tax credit (ITC) claims barred by time-limitation under Section 16(4) of the Central Goods and Services Tax Act, 2017 can be restored by virtue of the amendment inserting Section 16(5) with retrospective effect. 2. Whether impugned departmental orders reversing ITC and directing recovery (tax, interest, penalty) are sustainable where the amended Section 16(5) permits belated availment of ITC for specified financial years. 3. Whether ancillary reliefs - restraint on initiating recovery, de-freezing of bank accounts, refund/adjustment of amounts in ledgers and permission to proceed in cases involving non-limitation issues (e.g., fraud, excess or fake ITC) - should follow from quashing of orders limited to the limitation issue. ISSUE-WISE DETAILED ANALYSIS Issue 1: Effect of retrospective insertion of Section 16(5) on time-barred ITC claims under Section 16(4) Legal framework: Section 16(4) barred entitlement to take ITC after the thirtieth day of November following the end of the financial year to which the invoice pertains or furnishing of the relevant annual return, whichever is earlier. Section 16(5) (inserted retrospectively as of 01.07.2017) provided that, notwithstanding subsection (4), for invoices/debit notes pertaining to FYs 2017-18 to 2020-21 registered persons shall be entitled to take ITC in any return under Section 39 filed up to 30.11.2021. The amendment was effected by Finance Act (No.2) of 2024 and operationalised by CBIC Notification and Circular. Precedent treatment: The Court expressly followed a common earlier order of the same Court (dated 17.10.2024 in a batch of writ petitions) which construed the amendment and applied it to quash impugned orders that had reversed ITC on limitation grounds. That earlier order was applied here without distinguishing or overruling it. Interpretation and reasoning: The Court construed Section 16(5) as a clear legislative exception to the limitation in Section 16(4), operative retrospectively and applicable to the specified financial years. The legislative history (GST Council recommendation, Presidential assent, Finance Act amendment, and administrative Circular/Notification) was held to demonstrate Parliament's and the executive's intent to extend the deadline and render previously time-barred ITC claims permissible if filed in returns under Section 39 on or before 30.11.2021. Given that the petitioner's dispute solely concerned limitation under Section 16(4), the amendment supersedes the departmental orders premised on the old limitation rule. Ratio vs. Obiter: Ratio - The retrospective insertion of Section 16(5) removes the bar of Section 16(4) for FYs 2017-18 to 2020-21 and entitles registered persons to claim ITC in returns under Section 39 filed up to 30.11.2021; therefore, departmental orders reversing ITC on the ground of limitation are quashed insofar as they relate to that period. The discussion of the legislative events and administrative circulars forms part of the operative reasoning (ratio). No part of this construction was treated as obiter. Conclusions: Section 16(5) applies retrospectively and entitles eligible registered persons to avail ITC for the specified FYs if return under Section 39 was filed up to 30.11.2021; accordingly, orders reversing ITC solely on limitation under Section 16(4) are not sustainable and are quashed. Issue 2: Consequences of quashing limitation-based ITC reversal orders - restraint on recovery and de-freezing of bank accounts Legal framework: Writ jurisdiction permits quashing of administrative orders that are inconsistent with statutory amendments and appropriate relief attaching to such quashing (injunctive directions, restoration, de-freezing, refund/adjustment). Administrative directions (CBIC Circular/Notification) inform implementation. Precedent treatment: The Court followed its prior batch order in granting ancillary reliefs (restraint on proceedings, de-freezing, refund/adjustment) as incident to quashing the limitation-based part of assessment orders. Interpretation and reasoning: Since the impugned orders were quashed only insofar as they relied on limitation under Section 16(4) and the law (Section 16(5)) now permits the affected ITC claims, continuation of recovery measures or maintenance of bank account freezes would be unjustified pending compliance with the statutory entitlement. The Court therefore ordered restraint on further proceedings based on limitation, immediate steps to de-freeze bank accounts, dropping recovery steps taken during pendency on production of the quashing order, and refund or permission to adjust amounts collected in cash/credit ledgers. Ratio vs. Obiter: Ratio - Incidental reliefs (injunction on recovery, de-freezing, refund/adjustment) are warranted where administrative action has been invalidated insofar as it relies on a limitation now removed by statute; such reliefs are proper measures to give effect to the statutory entitlement. The administrative implementation instructions cited support the operative directions. Conclusions: The Department is restrained from initiating or continuing recovery actions based on the limitation issue; bank accounts frozen pursuant to the quashed orders must be de-frozen; amounts collected may be refunded or adjusted; recovery steps during pendency are to be dropped on production of the court order. Issue 3: Scope of quashing - preservation of Departmental rights to proceed where substantive irregularity, fraud, or excess/fake ITC is alleged Legal framework: Statutory entitlement to ITC is subject to compliance with substantive conditions (valid invoices, actual receipt of goods/services, matching requirements, absence of fraudulent or erroneous claims). Quashing of orders on one ground does not preclude fresh lawful proceedings on distinct grounds. Precedent treatment: The Court, following its earlier order, expressly preserved the Department's liberty to proceed in accordance with law where issues other than limitation (discrepancies, wrong/ excess/fake ITC) are involved. Interpretation and reasoning: The Court confined relief to the limitation dimension. It recognized that allegations of fraudulent or incorrect availment of ITC implicate distinct factual and legal inquiries. Accordingly, the Department was granted liberty to pursue proceedings on those non-limitation grounds notwithstanding the quashing of the limitation-based component. Ratio vs. Obiter: Ratio - Quashing relief limited to the ground(s) that have been invalidated by subsequent statutory change; liberty to proceed on independent substantive allegations is permissible and not barred by the relief granted. This is an integral part of the Court's operative order, not mere obiter. Conclusions: The Department may lawfully proceed against assessees on issues of discrepancies, wrong/excess/fake ITC or other substantive infractions; the quashing applies only to orders insofar as they were predicated on limitation under Section 16(4). Overall Conclusion The Court applied the retrospective amendment inserting Section 16(5), followed its prior batch decision, quashed departmental orders insofar as they reversed ITC on the ground of limitation for FYs 2017-18 to 2020-21 where returns under Section 39 were filed up to 30.11.2021, directed consequential reliefs (restraint on recovery, de-freezing, refund/adjustment), and preserved the Department's right to pursue proceedings on independent substantive allegations of irregularity or fraud. These holdings constitute the operative ratio of the decision.

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