Madras HC Sets Aside GST ITC Reversal for Proprietor, Cites Sec 16(4) Time Bar

The Madras High Court has annulled the order requiring the reversal of input tax credit (ITC) against a sole proprietor. The court has instructed the GST authorities to process any applicable refunds for amounts that have already been collected.

The department reversed the input tax credit of the applicant, Rajkumar Josephshine, citing a limitation u/s 16(4) of the CGST Act, 2017 (CGST Act), and demanded additional tax, penalty, and interest.

The counsel of the applicant, Adv. R.Krishnamurthy, by claiming that the GSTR-3B returns were filed post statutory due date, the applicant contested the assessment order on February 27, 2025, which rejected the claim of ITC.

The issue is whether the circumstances of the applicant shall benefit from the recently added Section 16(5) of the CGST Act, which retroactively extended the due date for claiming ITC for FYs 2017-18 to 2020-21.

During the proceedings of a writ petition, Justice Krishnan Ramasamy highlighted that the matter had previously been resolved in a common order issued on October 17, 2024, which addressed a series of similar writ petitions.

In that ruling, the Court acknowledged that many taxpayers faced challenges related to COVID-19, financial difficulties, and other legitimate issues, preventing them from filing their returns within the prescribed deadlines.

In its 53rd meeting, the GST Council recommended an extension of the Input Tax Credit (ITC) claim deadline until November 30, 2021, for specific financial years. This recommendation was subsequently enacted by the Parliament through the Finance Act (No.2) of 2024, which introduced a new sub-section (5) in Section 16, effective retroactively from July 1, 2017.

High Court, the applicant was eligible for the benefit of Section 16(5). Therefore, the impugned order has been quashed by the court to the extent it rejected the ITC claim only based on limitation.

From initiating any further proceedings on this issue, the GST department has been restrained and asked to defreeze the bank account of the applicant if it had been frozen in execution of the impugned demand.

In addition, the Court ordered that any tax amounts collected as a result of the invalidated assessment, regardless of whether they were taken from the cash ledger or the credit ledger, should be refunded to the petitioner.

Alternatively, the petitioner is permitted to utilise such amounts to utilise them to release future tax liabilities if the same have been re-credited to the ledger.

As per the order, the department keeps the right to move afresh if there are other grounds, like incorrect or excess availment or bogus ITC claims, irrelevant to the limitation issue.