Constitutional Validity of Section 16(4) of CGST Act, 2017 is upheld

By Hon’ble Patna High Court

In the matter of

Gobinda Construction Vs Union of India through the Secretary (Patna High Court) (Civil Writ Jurisdiction Case No. 9108 of 2021)

The Petitioner filed GSTR-3B for the month of Feb, 2019 and March, 2019 on 23.10.2019 and 07.11.2019 respectively. The respondent disllowerd the ITC claimed in GSTR-3B due to condition given under Section 16(4) of CGST Act, i.e., ITC can’t be claimed beyond the due date of filing of return for the month of September of following year. The Petitioner challenged that Section 16(4) is volatile of Article 300-A of Constitution of India as it takes way right to property.

Hon’ble High Court held that Section 16(4) if The language of Section 16 of the CGST Act suffers from no ambiguity and clearly stipulates grant of ITC subject to the conditions and restrictions put thereunder. Section 16(4) prescribes one of the conditions to make a registered person entitled to take ITC. Therefore, right of a registered person to take ITC under Section 16(1) becomes a vested right only if such condition is fulfilled. ITC is not unconditional and a registered person becomes entitled to ITC only if the requisite conditions given are fulfilled and restrictions given under Section 16(4) does not apply.Therefore, Section 16(4) of CGST Can’t be said to be violative of Article 300-A of the Constitution of India.

1. Brief facts of the case

• The petitioner filed the GSTR-3B for the month of Feb, 2019 and March, 2019 on 23rd October, 2019 and 7th November, 2019 respectively.
• The Petitioner received the SCN proposing to disallow ITC for the tax period of February and March 2019 on the ground of late filing of return in Form GSTR-3B.
• The petitioner replied that disallowance of ITC in terms of Section 16(4) of the Act was not justified. The petitioner claimed that it filed the return in prescribed Form GSTR-3B and had made necessary disclosures in the form.
• As per SCN, the petitioner had availed ITC for the tax period February 2019 and March 2019 in breach of Section 16(4) of the CGST Act. 
• Aggrieved by the order, the petitioner preferred an appeal before the Additional Commissioner of State Tax (Appeal). However, appeal got dismissed on the ground that ITC availed by the petitioner was inadmissible as per Section 16(4) of CGST Act.
• The authorities disallowed ITC availed by the petitioners for delayed filing of their return by invoking Section 16(4) of CGST Act.

2. Issues Before Hon’ble High Court

Common challenge before Hon’ble High Court is:

1. Constitutional validity of Section 16(4) of the CGST Act which denies entitlement of Input Tax Credit (ITC) for invoice or debit note after the due date of furnishing of returns of September Month of the following year. Section 16(4) is violative of Articles 14 and 300A of the Constitution of India.
2. Further, Conditions given u/s 16(4) of CGST Act are merely procedural in nature and cannot override substantive conditions prescribed under Section 16(1) and Section 16(2) of CGST Act. 
3. There is no non obstante clause given under Section 16(2) and therefore, the same shall prevail over Section 16(4) of the Act. 
4. Also, return in GSTR-3B cannot be treated to be a return prescribed under Section 39(1) of the CGST Act as it does not satisfy the parameters of a return contemplated under Section 39(1) of the said Act. Further, retrospective amendment, prescribing Form GSTR-3B as a return under Section 39(1) of the CGST Act, is ultra vires Section 39(1) of the CGST Act itself. 

3. Legal Extracts

Relevant Extracts of the law is reiterated below for ease of reference:

1. Section 16(4) of CGST Act:

“16. Eligibility and conditions for taking input tax credit.-

…

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

…”

Section 16(4) has been amended by the Finance Act, 2022, with effect from 01.10.2022, whereby the words and figures “due date of furnishing of the return under Section 39 for the month of September” stand substituted by “30th day of November”.

4. Contention of the Petitioner

The Petitioner has contented that;

1. ITC is a vested right under Article 300A of the Constitution of India and such protected and vested right cannot lightly be taken away due to belated filing of return. 
2. Further, Restrictions given under Section 16(4) would apply only to ITC of invoices or debit notes which are received after the end of the financial year beyond September month and not ITC Claimed in a belated return filed after such date. 
3. Also, ITC under Section 16(4) is the nature of tax paid at the stage of purchase of goods or services are vested rights under Article 300A of the Constitution of India and, therefore, to be adjusted with the tax payable on sale of goods or services both in computing the tax liability. 
4. Conditions given under Section 16(4) of the CGST Act are merely procedural in nature and cannot override the substantive conditions given under Section 16(1) and 16(2) of the said Acts.
5. Provision of Section 16(4) imposes unreasonable and disproportionate restriction on the right to freedom of trade and profession guaranteed under Article 19(1)(g) and it, therefore, violates Article 300A of the Constitution.
6. Further, disallowing ITC under Section 16(4) of the CGST Act amounts to double taxation and, thus, violates the principle of taxation on value addition. 

5. Contention of the Respondent

The Respondent contended that:

1. ITC is a benefit extended to a registered person under the CGST which can be availed only as per the scheme of the CGST Act.
2. Further, conditions given under Section 16(4) of the CGST Act is mandatory in nature for availing ITC under Section 16 of the Act. 
3. Payment of ITC at the time of purchase and supply to its supplier remains in the credit ledger of the dealer until the dealer discloses the transaction by way of filing return in Form GSTR- 3B. The amount of ITC is credited into the dealer’s electronic ledger and the same does not reach the Government until the dealer files its return and once the dealer files its return in Form GSTR-3B the amount of input tax lying in the credit ledger of the dealer reaches the Government Treasury. 
4. This is the reason why the Legislature has made such a provision under Section 16(4) of the CGST Act to prevent a dealer from filing the delayed return. 

6. Analysis and Findings by the Hon’ble High Court

Hon’ble Patna High Court made following discussion and interpretations:

a. Section 16(4) is not validation of Article 300-A of Constitution of India

• One of the primordial question is Whether ITC per se is a vested right and denials of the same by Section 16(4) of CGST Act would amount to infringement of the constitutional right under Article 300-A.
• Right to property under Article 300-A  is a human right and also a constitutional right. It cannot be taken away except in accordance with law. 
• Hon’ble Supreme Court, in the case of Jilubhai Nanbhai Khachar & Ors. vs. State of Gujarat & Anr. reported in 1995 Supp (1) SCC 596, has interpreted that:
  • The property is an aggregate of rights which are guaranteed and protected by law. 
  • It extends to every species of valuable right and interest, more particularly, ownership and exclusive right to a thing, the right to dispose of the thing in every legal way, to possess it, to use it, and to exclude everyone else from interfering with it. 
• Further, as per elementary principles of interpretation is to gather the intention of the Legislature. It is a fundamental rule of statutory interpretation that where the words are clear and there is no obscurity and ambiguity and the intention of the Legislature is clearly conveyed, there is no scope for the Court to amend or alter the statutory provisions. 
• As per the language of Section 16 of the CGST Act,  every registered person shall be entitled to take ITC charged on any supply of goods or services or both to them, which are used or intended to be used in accordance with the furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. This entitlement of ITC is,however, subject to :-
  • such conditions and restrictions as may be prescribed, and,
  • in the manner specified in Section 49

• Section 16(2) is a non obstante clause and clearly states that no registered person shall be entitled to the ITC unless he fulfills the requirements and satisfies conditions given in Clauses (a) to (d) thereof.
• Section 16(4) of CGST Act, in no unambiguous terms, provides that a registered person shall not be entitled to take ITC in respect of any invoice or debit note after 30th day of November (post amendment) of the following FY or furnishing of the relevant annual return, whichever is earlier. 
• The language of Section 16 of the CGST Act suffers from no ambiguity and clearly stipulates grant of ITC subject to the conditions and restrictions put thereunder.
• Further, ITC is not unconditional and a registered person becomes entitled to ITC only if the requisite conditions given are fulfilled and restrictions given under Section 16(4) does not apply.
• Section 16(4) prescribes one of the conditions to make a registered person entitled to take ITC. Therefore, right of a registered person to take ITC under Section 16(1) becomes a vested right only if such condition is fulfilled.
• To invoke Article 300-A of the Constitution by a person, two circumstances must jointly exist :-
  • Deprivation of property of a person
  • Without sanction of law

• In case of Jayam and Company vs. Assistant Commissioner & Anr. reported in (2016) 15 SCC 125,  the Supreme Court upheld constitutional validity of Section 19(20) of the Tamil Nadu Value Added Tax Act, 2006 and held that:
  • Whenever a concession is given by statute, the conditions attached to such concession are required to be strictly complied with in order to avail such concession. 
  • ITC is not the right of the “dealers” but it is a concession granted by virtue of Section 19. 
• As per Section 16(1) of CGST Act, provision of Section 16(4) is one of the conditions which makes a registered person entitled to take ITC. 
• Therefore, Section 16(4) of CGST Can’t be said to be violative of Article 300-A of the Constitution of India.

b. Section 16(4) is not volatile of Article 302 of CGST Act (Restricting right of freedom to trade and profession under Article 19(1)(g))

• The Petitioners have contended that Section 16(4) imposes unreasonable and disproportionate restriction on the right to freedom of trade and profession guaranteed under Article 19(1)(g) of the Constitution.
• Therefore, it is violative of Article 302 of the Constitution and is in teeth of Article 13 of the Constitution. 
• A legislation having uniform application to all registered persons can’t be considered as violative of Article 19(1)(g) of the Constitution. 

7. Conclusion

Hon’ble High Court held that Section 16(4) of CGST Act is constitutionally valid and is not violative of Articles 19(1)(g) and Article 300-A of the Constitution of India.