Deferred input tax credit denied u/s16(4): rectification of appellate order u/s107 reopened after 08.10.2024 notification

The dominant issue was whether rejection of rectification of an appellate order under s.107 of the WBGST Act, 2017, concerning deferred availment of ITC allegedly denied under s.16(4), was legally sustainable in light of a later notification. The HC held that the CBIC notification dated 08.10.2024 issued under s.148 clarifies eligibility and prescribes a procedure to seek rectification of original/appellate orders passed on the ground of wrongful ITC availment due to s.16(4), where the taxpayer may be entitled under s.16(5) or s.16(6). Consequently, the impugned rejection order was set aside and the matter remanded to the appellate authority for fresh consideration in accordance with law.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the Appellate Authority, while deciding an application for rectification made pursuant to the special procedure notified under Section 148, was required to examine the taxpayer's entitlement to Input Tax Credit under Section 16(5) and the Notification dated October 8, 2024, and whether refusal to do so vitiated the rectification rejection order.

(ii) Whether, on the facts recorded, the rectification rejection order suffered from legal infirmity because the Appellate Authority bypassed its earlier reliance on Section 16(4) (as noted in the appellate order) by stating in the rectification order that the case was not related to Section 16(4), without considering Section 16(5) and the notified rectification procedure.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Duty to consider rectification application in light of Section 16(5) and the Notification dated October 8, 2024 issued under Section 148

Legal framework: The Court addressed Section 16(5) (as inserted retrospectively) providing one-time relief by extending time to avail ITC for specified financial years upon lodging the claim within November 30, 2021. The Court also considered the Notification dated October 8, 2024 issued under Section 148, which clarifies and provides a procedure for seeking rectification of original or appellate orders passed against a person on account of wrongful availment of ITC due to contravention of Section 16(4), where the person is otherwise entitled under Section 16(5) (or 16(6)).

Interpretation and reasoning: The Court found there to be no dispute on the legal position that a registered person satisfying Section 16(5) and the relevant Notifications is entitled to claim ITC for the covered financial years by lodging the claim within November 30, 2021. Since the rectification application was made specifically on the strength of the Notification dated October 8, 2024, the Appellate Authority was required to revisit the matter and consider entitlement in light of Section 16(5) and the notified special rectification procedure, rather than reject the application without applying that governing legal position.

Conclusion: The Court held that the Appellate Authority ought to have considered the rectification application afresh in the light of Section 16(5) and the Notification dated October 8, 2024; failure to do so warranted interference, setting aside the rectification rejection and remanding the matter for reconsideration in accordance with law.

Issue (ii): Validity of rectification rejection where the Appellate Authority avoided examining Section 16(4) linkage and failed to apply Section 16(5)/Notification framework

Legal framework: The Court examined that the earlier appellate order had referred to Section 16(4) as a ground to confirm the adjudication order and reject the appeal, whereas the rectification mechanism notified under Section 148 was directed to cases where adverse orders were passed on account of contravention of Section 16(4), but the taxpayer could claim benefit under Section 16(5).

Interpretation and reasoning: The Court noted an inconsistency: despite the earlier appellate order relying on Section 16(4), the subsequent rectification rejection stated that the case was not related to Section 16(4), and thereby bypassed the very basis on which the special rectification procedure could be attracted. In the Court's view, once the rectification application was founded on the October 8, 2024 Notification and the statutory change in Section 16(5), the Appellate Authority was obliged to apply that legal framework and reconsider whether rectification was warranted, instead of declining rectification by characterising the matter as unrelated to Section 16(4) without undertaking the necessary examination under Section 16(5) and the Notification.

Conclusion: The Court concluded that the rectification rejection order was unsustainable for non-consideration of the applicable legal position and procedure; it was therefore set aside and the matter remanded to the Appellate Authority for fresh consideration specifically in light of Section 16(5) and the Notification dated October 8, 2024.

Ancillary direction (material to disposal): The Court recorded that if any substantial sum had been recovered in the meantime, the taxpayer was given liberty to seek refund of the recovered sum in accordance with law; the Court did not itself order refund.

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