2025 (6) TMI 834 - HC - GST

Refund of unutilized Input Tax Credit (ITC) lying in Electronic Credit Ledger - whether the refund of ITC under Section 49(6) of the CGST Act is only limited to companies carved out under Section 54(3) of the CGST Act or does every registered company have a right to refund of ITC in case of discontinuance of business? - HELD THAT - As can be seen in Slovak India Trading Company Private Limited 2006 (7) TMI 9 - KARNATAKA HIGH COURT the company had applied for refund for unutilized input credit which was available at the time of closure of unit. The Customs Excise And Service Tax Appellate Tribunal (CESTAT) allowed the refund stating inter alia that it cannot be rejected on closure of the company. The High Court agreed and opined that there is no express prohibition in Rule 5 of the CENVAT Credit Rules 2002. The impugned Order is set aside - Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether a registered person is entitled to claim refund of unutilized Input Tax Credit (ITC) lying in the Electronic Credit Ledger upon discontinuance or closure of business under the Central Goods and Services Tax Act, 2017 (CGST Act);

(b) Whether Section 49(6) of the CGST Act, which provides for refund of balance in electronic cash or credit ledger in accordance with Section 54, confers a right to refund of unutilized ITC on business closure, notwithstanding the exceptions carved out in Section 54(3);

(c) Whether the proviso to Section 54(3) of the CGST Act, which restricts refund of unutilized ITC to specified circumstances, excludes refund claims arising from business discontinuance;

(d) Whether the Petitioners were required to exhaust alternative statutory remedies under Section 112 of the CGST Act before approaching the High Court;

(e) The scope and applicability of judicial discretion under Article 226 of the Constitution in entertaining writ petitions despite availability of alternative remedies;

(f) The relevance and applicability of precedents concerning refund of unutilized input credit on closure of business or cessation of manufacture under analogous statutory regimes.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Entitlement to refund of unutilized ITC on business discontinuance under Sections 49(6) and 54 of the CGST Act

The legal framework involves a combined reading of Section 49(6) and Section 54 of the CGST Act. Section 49(6) provides that the balance in the electronic cash or credit ledger after payment of tax, interest, penalty, fee or any other amount payable may be refunded in accordance with Section 54. Section 54(1) prescribes the procedural requirements for claiming refund of tax, interest or other amounts paid.

Section 54(3) specifically addresses refund of unutilized ITC, permitting refund only in two circumstances: (i) zero rated supplies made without payment of tax; and (ii) where credit has accumulated due to the rate of tax on inputs being higher than on output supplies (excluding nil rated or fully exempt supplies), subject to certain exceptions. The provisos further restrict refund in cases involving export duty or drawback claims.

The Appellate Authority had held that since discontinuance or closure of business is not enumerated as a ground for refund under Section 54(3), the Petitioners' claim for refund of unutilized ITC on business closure was not permissible.

The Petitioners contended that Section 49(6) confers a right to refund of the balance in the Electronic Credit Ledger after payment of dues, and Section 54(3) is an exception limiting refund only in certain cases, which should not exclude refund on business closure. They argued the proviso to Section 54(3) cannot divest them of their vested right to refund of accrued ITC. Reliance was placed on precedents including Shabnam Petrofils Pvt. Ltd. and Eicher Motors Ltd. which support refund claims under similar circumstances.

The Court examined the statutory language and noted that Section 49(6) refers to refund "in accordance with the provisions of Section 54," thereby making Section 54 the guiding provision for refund claims. While Section 54(3) restricts refund of unutilized ITC to specified cases, the statute does not expressly bar refund in case of business closure. The Court observed that the CGST Act does not authorize retention of tax or ITC without legal sanction.

In this context, the Court considered the decision in Slovak India Trading Company Private Limited, where the High Court of Karnataka upheld refund of unutilized credit on closure of a manufacturing unit under the CENVAT Credit Rules, 2002. The Court noted that the absence of an express prohibition in the statute or rules for refund on closure was a decisive factor. The Tribunal and the High Court had rejected the Revenue's contention that refund was impermissible due to closure or cessation of manufacture.

Applying this reasoning, the Court held that the Petitioners were entitled to refund of the unutilized ITC balance upon closure of their business. The Court emphasized that the statutory provisions do not expressly exclude refund on business discontinuance and that such a claim cannot be denied merely on the basis of the exceptions in Section 54(3). The Court concluded that the Petitioners' claim was legally sustainable.

Issue (c): Interpretation of proviso to Section 54(3) and its applicability to business closure

The proviso to Section 54(3) restricts refund of unutilized ITC to two specified scenarios and excludes refund in cases involving export duty or drawback claims. The Appellate Authority had interpreted this proviso as excluding refund claims arising from business closure.

The Court disagreed with this restrictive interpretation, holding that the proviso does not expressly bar refund on account of business discontinuance. The Court reasoned that the statutory scheme contemplates refund of balances in the electronic credit ledger after payment of dues, and the absence of explicit prohibition means such refund cannot be denied. The Court thus construed the proviso narrowly and held it does not preclude refund on closure of business.

Issue (d) and (e): Non-exhaustion of alternative remedies and the exercise of writ jurisdiction

The Respondents contended that the Petitioners had not exhausted the alternative statutory remedy under Section 112 of the CGST Act, which provides for revision by the Commissioner, and thus the writ petition was not maintainable.

The Court examined the principles governing exercise of writ jurisdiction under Article 226 of the Constitution. It referred to the Supreme Court's decisions in State of U.P. vs. Indian Hume Pipe Co. Ltd. and M/s. Godrej Sara Lee Ltd. vs. Excise and Taxation Officer, which clarify that availability of an alternative remedy is not an absolute bar to entertaining a writ petition. The Court emphasized that the power to issue prerogative writs is plenary and discretionary, and mere non-pursuit of an alternative remedy does not oust jurisdiction.

The Court found no question of fact requiring determination and that the matter involved pure questions of law. The Court held that the writ petition was maintainable and the argument regarding non-exhaustion of alternative remedy was not a ground for dismissal.

Issue (f): Treatment of competing arguments and application of precedents

The Respondents' primary argument was that the statute does not recognize business closure as a ground for refund of unutilized ITC and that the Petitioners' claim was devoid of statutory support. They relied on the statutory scheme and the impugned orders.

The Petitioners countered by relying on the statutory provisions read harmoniously, the absence of express prohibition, and judicial precedents allowing refund of unutilized credit on closure or cessation of business or manufacture.

The Court gave due consideration to both sides and found the Petitioners' submissions more persuasive in light of the statutory text and judicial precedents. The Court applied the principle that tax or credit cannot be retained without legal authority and that refund claims should be allowed unless expressly barred. The Court also relied on the Slovak India Trading Company decision as directly analogous and supportive.

3. SIGNIFICANT HOLDINGS

The Court held:

"It is evident in the instant matter no question of fact requires determination and the matter was filed before this Court seeking its interference for the reasons made out in the prayers as already revealed (supra). The exercise of plenary powers by this Court as well as exercise of discretion in no manner is limited as already pointed out by the Supreme Court in M/s. Godrej Sara Lee Ltd. (supra). This thereby lends a quietus to the argument raised by Learned Deputy Solicitor General."

"Similarly, in the instant matter there is no express prohibition in Section 49(6) read with Section 54 and 54(3) of the CGST Act, for claiming a refund of ITC on closure of unit. Although, Section 54(3) of the CGST Act deals only with two circumstances where refunds can be made, however the statute also does not provide for retention of tax without the authority of law. Consequently, I am of the considered view that the Petitioners are entitled to the refund of unutilized ITC claimed by them and it is ordered so."

The Court set aside the impugned appellate order rejecting the refund claim and allowed the writ petition.

The core principles established include:

• Refund of unutilized Input Tax Credit lying in the Electronic Credit Ledger upon closure or discontinuance of business is not expressly prohibited under the CGST Act and is thus permissible;
• Section 49(6) read with Section 54 of the CGST Act governs refund claims of balances in electronic ledgers, and Section 54(3) exceptions do not exclude refund on business closure;
• The availability of alternative statutory remedies does not bar the High Court's exercise of writ jurisdiction under Article 226, especially where no factual disputes exist and the matter involves pure questions of law;
• Statutory provisions should be construed to avoid unjust retention of tax or credit without legal authority;
• Precedents under analogous statutes permitting refund of unutilized credit on closure of business or cessation of manufacture are applicable and persuasive.