TaxTMI 
TaxTMI 
Refund of ITC on Business Closure: A Critical Analysis of the Sikkim HC Judgement
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....efund of ITC on Business Closure: A Critical Analysis of the Sikkim HC Judgement<br>By: - Shreya Agarwalla<br>Goods and Services Tax - GST<br>Dated:- 25-6-2025<br>Introduction: The jurisprudence surrounding refunds under the Goods and Services Tax (GST) regime has seen a significant development with the Sikkim High Court's ruling in SICPA India Pvt. Ltd. v. Union of India [2025 (6) TMI 834 - SIKKIM HIGH COURT]. The Court allowed refund of unutilized Input Tax Credit (ITC) lying in the Electronic Credit Ledger (ECL) upon closure of business, marking a departure from the prevailing interpretation of refund eligibility under Section 54 of the Central Goods and Services Tax Act, 2017 (CGST Act). While this decision may appear equitable from th....
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....e taxpayer's perspective, it raises serious concerns of statutory overreach, judicial inconsistency, and deviation from settled principles of tax interpretation. Statutory Framework: To understand the fault lines in the Sikkim High Court's ruling, one must begin with the relevant statutory text. Section 49(6) of the CGST Act states: "The balance in the electronic credit ledger after payment of tax under this section may be refunded in accordance with the provisions of Section 54." This provision allows refund of credit balance, but explicitly makes it subject to Section 54, indicating a conditional enablement, not an independent right. Section 54(1) provides: "Any person claiming refund of any tax and interest, if any, paid on such....
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.... tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed." Further, Section 54(3) stipulates: "Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period: Provided that no refund of unutilised input tax credit shall be allowed in cases other than- (i) zero rated supplies made without payment of tax; (ii) where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified..."....
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.... Statutory Interpretation: A critical flaw in the judgment lies in its departure from settled interpretative norms applicable to taxing statutes. 1. Expressio unius est exclusio alterius This Latin maxim translates to: "The express mention of one thing implies the exclusion of others." The application of this rule to Section 54(3) is straightforward. The legislature has clearly specified two situations where refund of unutilized ITC is allowed. The omission of business closure from this list must be interpreted as a conscious legislative decision to exclude it from refund eligibility. The Sikkim High Court, by treating the absence of prohibition as allowance, inverts the operation of this maxim, effectively allowing what the statute has....
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.... chosen not to. The principle compels courts to read tax provisions as written, not as they could have been. By doing otherwise, the judgment risks judicial legislation, a domain that is constitutionally reserved for Parliament. 2. Taxing Statutes Must Be Strictly Construed It is well settled that taxing statutes are to be interpreted strictly. In CIT v. Calcutta Knitwears [2014 (4) TMI 33 - SUPREME COURT], the Court held: "It is a well-settled principle in law that in a taxation statute, there is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax." This approach is echoed in Vidarbha Irrigation Dev. Corp. v. ACIT [(2004 (7) TMI 67 - BOMBAY HIGH COURT], where it was stated: "Courts must n....
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....ot give words in a taxing statute a strained and unnatural meaning to bring situations not intended by the legislature within its purview." The Sikkim HC's judgment, by adopting an equitable and purposive reading, defies this principle. In taxation, literal construction reigns supreme, even if it leads to perceived hardship or inequity. Overlook of Judicial Precedents: The VKC Footsteps Case The Supreme Court in VKC Footsteps India Pvt. Ltd. v. Union of India [(2021 (9) TMI 626 - SUPREME COURT] interpreted Section 54(3) narrowly and refused to read into it the eligibility for refund of ITC on input services. The apex court emphasized that refund is a statutory right, not a constitutional right, and the scope of such refund must be restr....
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....icted to what is explicitly provided in the statute. "There is no constitutional entitlement to seek a refund... Parliament has... legislated to restrict refund to specific situations under Section 54(3)." (Para 103) This ruling has binding force under Article 141 of the Constitution. The Sikkim High Court, being a court of coordinate jurisdiction, could not have diluted this authoritative pronouncement through a liberal construction of Section 49(6). The Gauri Plasticulture Case The Gauri Plasticulture Pvt. Ltd. v. CCE [2019 (6) TMI 820 - BOMBAY HIGH COURT] decision by the Bombay High Court (Larger Bench) also militates against the Sikkim HC's view. The Court held that refund upon business closure was not available unless expressly pro....
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....vided, and characterized CENVAT credit as a concession rather than a vested right. It rejected Slovak India as not binding and emphasized that fiscal benefits cannot be assumed in the absence of statutory sanction. This decision aligns with the Supreme Court's reasoning in Jayam & Co. (2016 (9) TMI 408 - SUPREME COURT) and Ind-Swift Laboratories (2011 (2) TMI 6 - SUPREME COURT), both of which stress that credit and refund under tax law are legislatively regulated and not susceptible to judicial expansion. Redundancy of Section 54(3): A fundamental concern with the Sikkim High Court's ruling is that its reading of Section 49(6), in effect, renders Section 54(3) otiose-a result impermissible under well-established rules of statutor....
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....y interpretation. The Court held that refund of ITC upon business closure could be allowed under Section 49(6) read with Section 54, merely because the statute does not expressly prohibit such a refund. However, such a construction fundamentally disrupts the structural logic and legislative hierarchy of the refund provisions under the CGST Act. Section 54(3), quoted earlier, expressly stipulates: "...no refund of unutilised input tax credit shall be allowed in cases other than- (i) zero rated supplies made without payment of tax; (ii) where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies..." This language is categorical and exclusionary. The use of the negative ....
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....expression "no refund... shall be allowed in cases other than..." reflects a clear legislative intent to confine refund of unutilised ITC to only two specified circumstances. These two cases form a closed class, and any situation not explicitly mentioned is excluded by necessary implication. Such interpretation leads to Judicial Overreach. However, under the Sikkim High Court's interpretation, Section 49(6) becomes an independent source of refund entitlement, detached from the conditionality imposed by Section 54(3). This view effectively creates a general refund right of unutilised ITC merely because the amount lies in the electronic credit ledger and is not expressly prohibited by Section 54. Such a reading decouples Section 49(6) from ....
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....its statutory reference to Section 54 and allows what Section 54(3) clearly seeks to disallow-refunds in unspecified cases, such as business closure. The implication is doctrinally untenable. If Section 49(6) allows refunds in cases beyond those listed in Section 54(3), the restrictive language of Section 54(3) is rendered surplusage. Courts have repeatedly held that no provision in a statute should be interpreted in a way that makes another provision meaningless or redundant. In K.P. Varghese v. ITO [1981 (9) TMI 1 - SUPREME COURT], the Court emphasized that statutory interpretation must avoid a construction that would render any part of the statute "nugatory or otiose." Moreover, this interpretation offends the principle of harmonious c....
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....onstruction, which mandates that different provisions of the same statute must be read together so as to give effect to all, rather than allowing one to override or nullify another. A harmonious reading of Sections 49(6) and 54(3) leads to the conclusion that refund of balance in the credit ledger is permissible only when the conditions of Section 54(3) are satisfied. Section 49(6) is thus a procedural enabling clause, not a substantive right, and must be interpreted in accordance with the express limitations embedded in Section 54. By ignoring this interrelationship and elevating Section 49(6) to a standalone source of substantive entitlement, the Sikkim High Court inadvertently collapses the statutory architecture governing refund eligib....
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....ility. If its interpretation is accepted, it would allow refunds in any situation where ITC is unutilised, not just zero-rated exports or inverted duty cases and thereby nullifying the careful legislative balance inbuilt into Section 54(3). Such an interpretation is not only legally flawed but also invites wide-ranging fiscal consequences and potential abuse of the ITC framework. Conclusion: The Sikkim High Court's ruling in SICPA India Pvt. Ltd. undeniably offers short-term relief to taxpayers facing stranded Input Tax Credit upon closure of business. However, when scrutinized in light of statutory provisions, judicial precedent, and established canons of fiscal interpretation, the judgment emerges as a problematic deviation from legisla....
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....tive intent. By construing Section 49(6) as a substantive standalone provision and detaching it from the conditional framework of Section 54(3), the Court has opened the door to a refund regime unconstrained by statutory limits. This interpretation not only renders Section 54(3) effectively redundant but also disregards the binding precedent of the Supreme Court in VKC Footsteps, which held refund entitlements to be strictly statutory and not equitable. The larger jurisprudential concern is the risk of systemic abuse-refund on closure opens the door to "build-credit-then-exit" frauds, undermining the foundational architecture of GST, which is predicated on seamless credit flow tied to actual supplies. Businesses may strategically accumulat....
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....e credits and close operations merely to encash ITC balances, thereby causing significant leakage of public revenue and distorting the purpose of input taxation. In a domain where legislative clarity and fiscal discipline are paramount, judicial innovation must be tempered with restraint. Until legislative or constitutional clarification is offered by the Supreme Court or the GST Council, the Sikkim High Court's approach should be treated as an outlier rather than a precedent for expansion of refund entitlements under GST. It serves as a reminder that in tax law, equity yields to express legislative command, and statutory text remains the ultimate authority.<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....