2025 (6) TMI 665 - HC - GST

Challenge to the adjudication order - seeking for declaration to declare Section 168A of the CGST/WBGST Act 2017 - wrong availment of input tax credit on account of contravention of provision of sub-section (4) of Section 16 of the Act - HELD THAT - The Central Board of Indirect Taxes and Customs issued Notification No.22/2024 Central Tax dated 8th October 2024 by which a special procedure for rectification of order to be followed by the class of registered persons against whom any order under Section 73 or Section 74 or Section 107 or Section 108 of the Act has been issued confirming the demand for wrong availment of input tax credit on account of contravention of provision of sub-section (4) of Section 16 of the Act. The procedure has also been stipulated. Similar view was taken by the High Court of Jharkhand at Ranchi in Singh Construction Company Vs. State of Jharkhand 2024 (9) TMI 1230 - JHARKHAND HIGH COURT . The only factual difference in the case on hand is that the show-cause notice has ripened into an adjudication order. However taking note of the fact that the statute has been amended by insertion of sub-section (5) to Section 16 we are of the view that the show-cause notice should re-adjudicated. The order of adjudication is set aside and the show-cause is restored to the file of the adjudicating authority to be re-adjudicated taking into consideration sub-section (5) of Section 16 of the Act which has been made effective with effect from 1st July 2017 - Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this judgment are:

• Whether Section 168A of the CGST/WBGST Act, 2017 is ultra vires the Constitution or otherwise liable to be struck down (initially raised but later abandoned by the appellants).
• Whether the adjudication order dated 22nd January, 2024, confirming demand for alleged wrongful availment of input tax credit, is sustainable in law.
• Whether the adjudication order should be set aside and the matter remanded for re-adjudication in view of the subsequent statutory amendment by insertion of sub-section (5) to Section 16 of the CGST Act, 2017, which provides a retrospective window for taking input tax credit for specified financial years.
• Whether the appellants are entitled to the return of the deposited security amount and the accrued interest, and if so, on what terms.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Challenge to Section 168A of the CGST/WBGST Act, 2017

Relevant legal framework and precedents: Section 168A of the CGST Act deals with certain procedural or substantive aspects related to adjudication or enforcement under the GST regime. The appellants initially sought a declaration that this section was ultra vires, presumably on constitutional or statutory grounds.

Court's interpretation and reasoning: During the course of proceedings, the appellants expressly abandoned this prayer. The Court recorded this submission and accordingly struck off the prayer challenging Section 168A.

Conclusions: No further adjudication on the vires of Section 168A was required or undertaken.

Issue 2: Validity of the adjudication order dated 22nd January, 2024

Relevant legal framework: The adjudication order was passed under the CGST/WBGST Act, following issuance of a show-cause notice alleging wrongful availment of input tax credit in contravention of sub-section (4) of Section 16 of the Act. The relevant provisions include Sections 73, 74, 107, and 108, which govern demand recovery and adjudication procedures. The key statutory amendment is the insertion of sub-section (5) to Section 16 by Finance (No.2) Act, 2024, effective from 27th September, 2024.

Key evidence and findings: The appellants had deposited Rs. 25 lakhs as security pursuant to an interim order restraining coercive action. The adjudication order was challenged on the ground that the statutory position had changed during pendency of the writ petition due to the insertion of sub-section (5) to Section 16, which grants a retrospective opportunity to claim input tax credit for invoices/debit notes pertaining to financial years 2017-18 through 2020-21, if claimed by 30th November, 2021.

Court's interpretation and reasoning: The Court noted that the statutory amendment created a new legal regime that had to be considered by the adjudicating authority. The Court relied on precedents from the High Courts of Delhi and Jharkhand, which had directed re-adjudication of similar show-cause notices/orders in light of the insertion of sub-section (5) to Section 16. The Court observed that although in the present case the show-cause notice had already ripened into an adjudication order, the change in law warranted setting aside the order and remanding the matter for fresh adjudication.

Application of law to facts: The Court set aside the impugned adjudication order dated 22nd January, 2024 and restored the show-cause notice to the file of the adjudicating authority. The authority was directed to re-adjudicate the matter afresh, taking into account the newly inserted sub-section (5) to Section 16, effective retrospectively from 1st July, 2017. The appellants were to be afforded an opportunity to file additional replies and to be heard personally through their authorized representatives.

Treatment of competing arguments: The Court did not elaborate on detailed submissions opposing the remand but implicitly rejected any argument that the adjudication order should stand despite the statutory amendment. The Court prioritized the principle of law that changes in statutory provisions affecting substantive rights must be given effect to by the adjudicating authority.

Conclusions: The adjudication order was unsustainable without considering the amended statutory provision and was accordingly set aside for re-adjudication.

Issue 3: Return of deposited security and treatment of accrued interest

Relevant legal framework: The interim order required deposit of Rs. 25 lakhs in an interest-bearing fixed deposit with a nationalized bank to restrain coercive action. The Court had to determine the fate of this deposit and accrued interest post final adjudication.

Court's interpretation and reasoning: Since the adjudication order was set aside, the Court directed the return of the deposited amount to the appellants after deducting any commission charges. However, the interest accrued on the deposit was not returned to the appellants but was directed to be credited to the West Bengal State Legal Services Authority.

Application of law to facts: The Court balanced the interests of the parties and public policy by returning the principal amount to the appellants while diverting the interest accrued to a public legal services authority, presumably to support legal aid and related activities.

Conclusions: The appellants were entitled to the principal amount deposited, but not the interest accrued thereon, which was to be credited to the State Legal Services Authority.

3. SIGNIFICANT HOLDINGS

The Court held:

"The adjudicating authority shall afford one more opportunity to the appellants/writ petitioners to submit an additional reply to the show-cause notice and re-adjudicate the matter in accordance with law after affording an opportunity of personal hearing to the authorised representative of the appellants/assessee."

"The appeal and the writ petition are allowed and the order of adjudication is set aside and the show-cause is restored to the file of the adjudicating authority to be re-adjudicated taking into consideration sub-section (5) of Section 16 of the Act, which has been made effective with effect from 1st July, 2017."

"The amount of Rs.25 lakhs, which was deposited before the learned Registrar General and in turn directed to be invested in an interest bearing account shall be returned to the appellants after deducting the commission deductible. So far as the interest, which has accrued on the said sum of Rs.25 lakhs, the same shall not be returned to the appellants but to be credited to the account of the West Bengal State Legal Services Authority."

Core principles established include:

• Statutory amendments affecting substantive rights, even if introduced during pendency of proceedings, must be considered by the adjudicating authority, mandating re-adjudication where necessary.
• Interim deposits made to restrain coercive action are refundable upon setting aside of the impugned order, but accrued interest may be appropriated for public purposes.
• Abandonment of a legal challenge (such as to the vires of a statutory provision) must be recorded and results in striking off that prayer from the writ petition.

Final determinations:

• The prayer challenging Section 168A was struck off as abandoned.
• The adjudication order dated 22nd January, 2024 was set aside.
• The show-cause notice was restored and directed to be re-adjudicated in light of sub-section (5) to Section 16 of the CGST Act.
• The appellants were granted opportunity for additional submissions and personal hearing during re-adjudication.
• The deposited Rs. 25 lakhs was to be returned to appellants (less commission), but interest accrued was to be credited to the West Bengal State Legal Services Authority.
• No costs were imposed on either party.