Kerala High Court

Yin-Yang Nature of ITC and Supplier-Purchaser Obligations

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In a recent decision, the Kerala High Court upheld constitutionality of Section 16, CGST, 2017, specifically Section 16(2)(c) which restricts the ITC of a purchasing dealer (‘purchaser’) if the supplier has not remitted tax collected from the purchaser to the Government. The decision examines validity of the conditions to claim ITC under Section 16(2)(c) and Section 16(4). In this article, I examine the only the former by headlining two under-examined aspects of ITC: first, nature of ITC as a right/concession; second, the reliance of purchaser on supplier to claim ITC. Both aspects influence each other and in turn the success or otherwise of claims related to ITC. The issue relating to time limit for claiming ITC under Section 16(4) – though an influential part of the judgment – will be subject of a separate post.   

ITC: Right or a Concession? 

One of petitioner’s contention before the Kerala High Court was that ITC is a right of the purchaser and not a concession given by the Government. And since ITC is a property of the purchaser, denying the same for supplier’s default to remit tax is violative of purchaser’s right to property under Article 300A of the Constitution. The State countered the purchaser’s argument and argued that ITC is a concession granted by the State to avoid cascading effect of taxes, and the State can impose such restrictions as it deems fit to restrict taxpayer’s claim for ITC.

In deciding the true nature of ITC, and whether it is a right or a concession, the Kerala High Court gave an unambiguous conclusion that: 

The Input Tax Credit is in the nature of a benefit or concession extended to the dealer under the statutory scheme. Even if it is held to be an entitlement, this entitlement is subject to the restrictions as provided under the Scheme or the Statute. The claim to Input Tax Credit is not an absolute right, but it can be said that it is an entitlement subject to the conditions and restrictions as envisaged in Sections 16(2) to 16(4), Section 43, and Rules made thereunder. (para 71) (emphasis added)

The Kerala High Court cited a slew of precedents that aligned with its conclusion. The language here is noteworthy: the High Court is clearly leaning in favor of ITC being a concession and not a right, though it says it is not an ‘absolute right’. What does it mean? It can imply that either ITC is a limited right and can be subject to certain conditions by the State. Or that ITC is not a right but a concession. The latter seems more likely, but it is not clear. But does the distinction matter? If ITC is a taxpayer’s right, then it imposes a greater burden on the State before curtailing it. While conceptualizing ITC as a concession provides the State a comparatively wide leeway to impose conditions before allowing a taxpayer to claim ITC. If the policy decision of providing taxpayers of claiming ITC is a concession from inception, then even onerous restrictions on such claims are within the State’s remit. And a taxpayer needs to fulfil the conditions – onerous or otherwise – to successfully claim ITC since there is no vested right to claim ITC. The State has extended a concession on certain conditions and to avail the concession, the taxpayer needs to fulfil the prescribed conditions.  

In abstract, there are no easy answers if ITC is a concession or a right, though I’ve suggested elsewhere that if we bifurcate the stages of ITC: first stage involving claim of ITC and then the latter stage of utilizing ITC, there is room to suggest that ITC should be understood as one or the other depending on which stage is relevant to the case at hand. But a broad approach that ITC is a concession, irrespective of whether it is the stage of claiming of ITC or its utilization may not be the best way to answer this dilemma. The Kerala High Court does mention that GST laws contemplate four stages vis-à-vis ITC but didn’t co-relate it to the issue of nature of ITC. (para 11)  

Finally, it never was the purchaser’s claim that ITC is an absolute right. The purchaser’s claim was that if the conditions prescribed under the statutory provisions and rules have been fulfilled by the purchaser, then ITC transforms into its right, and denial of the same amounts to violation of right to property. By dismissing the argument by characterizing it as a claim for an absolute right, the Kerala High Court did not to do justice to the petitioner’s claim. Also, the core question before the High Court was whether the onerous conditions such as those prescribed under Section 16(2)(c) and Section 16(4), place all purchasers – bona fide and those colluding with suppliers – in a similar category and thereby violate Article 14 of the Constitution. The High Court’s analysis of the arguments relating to Article 14 was bereft of a comprehensive analysis as I elaborate in the section below.      

Purchaser’s Reliance on Supplier 

Section 16(2)(c) states that no person shall be entitled to claim ITC unless the tax charged in respect of such supply has been actually paid to the Government either in cash or utilization of ITC admissible in respect of such supply. This condition translates into the supplier filing their monthly return – GSTR-1 – indicating its outward supplies for the month. The information in the said return will auto-populate a return of the purchaser – GSTR-2A – which will indicate the inward supplies of the purchaser. The latter informs the purchaser’s claim for ITC. As is understandable, the purchaser is dependent on the supplier filing GSTR-1 accurately and in a timely fashion to enable it to claim ITC.

The purchaser’s argument was that GSTR-2A is a dynamic, read-only document, and is merely a facilitation document. And if certain purchases are not reflected in GSTR-2A, then it cannot be the basis of denial of ITC. The purchaser argued that if it possesses all the documents listed in Rule 36, CGST Rules, 2017, i.e., tax invoice, proof payment, actual receipt of goods then it should be presumed to have discharged the burden of genuineness of its ITC claim. Also, the purchaser cannot be burdened to ensure that the supplier has remitted the tax as it an impossible condition to fulfil for the purchaser. In the absence of purchaser lacking the resources to force a supplier to remit the tax, the doctrine of impossibility should be applicable. And since Section 16(2)(c) prescribes an impossible condition, it should be held as unconstitutional.  

The purchaser’s final argument vis-à-vis Section 16(2)(c) was that the provision treats bona fide purchasers similarly as purchasers that collude with suppliers to fraudulently claim ITC thereby being violative of Art 14. The purchaser’s claim was that denial of ITC to bona fide purchaser for supplier’s default in tax payment was arbitrary and irrational exercise of power. The purchaser also made an alternative argument that Section 16(2)(c) should restrict its ITC only if mala fide on its part was established. And that purchaser’s ITC should not be blocked if it has all the documentary evidence and by extension a prima facie proof of its bona fide intent and transaction.   

State’s defence of making the purchaser’s claim of ITC dependent on supplier’s payment of tax was as follows: the State argued that ITC ‘crosses State borders’. The supplier in originating State USES SGST/CGST credits of IGST collected from the purchaser and the latter will discharge output liability by claiming SGST/CGST credits of the IGST paid to the supplier. The originating State and the Union are under an obligation under Section 53, CGST Act, 2017 to transfer the CGST/SGST component utilized by the supplier and make it available to the destination State, since GST is a destination-based tax. The State’s claim was that if the supplier defaults in remitting the tax, but purchaser it allowed to claim ITC based on invoice, the originating State would have transferred tax to destination State without the former having received the tax. 

The purchaser raised some important and vital Constitutional arguments, but the Kerala High Court’s summary analysis was a complete endorsement and replication of the State’s argument and it concluded that: 

Considering the aforesaid scenario, without Section 16(2)(c) where the inter-state supplier’s supplier in the originating State defaults payment of tax (SGST+CGST collected) and the inter-state supplier is allowed to take credit based on their invoice, the originating State Government will have to transfer the amounts it never received in the tax period in a financial year to the destination States, causing loss to the tune of several crores in each tax period. (para 83)

The Kerala High Court added that: 

… this renders the whole GST laws and schemes unworkable. Therefore, as contended, the conditions cannot be said to be onerous or in violation of the Constitution, and Section 16(2)(c) is neither unconstitutional nor onerous on the taxpayer. (para 84)

The Kerala High Court dismissed the Constitution and fundamental rights-based arguments by agreeing to the State’s argument about administrative workability of the GST. But the High Court never seriously engaged with the argument if Section 16(2)(c) places a bona fide purchaser in the same category as a purchaser who colludes with a supplier to claim ITC fraudulently. The two categories of purchasers, prima facie, constitute two different categories. Neither was the ‘doctrine of impossibility’ squarely addressed by the High Court. How can a purchaser ensure that the supplier remits GST to the State? The purchaser can, ordinarily speaking, pay the tax to the supplier and ensure it has adequate proof of the payment. Persuading or forcing the supplier to remit the tax to the State in a timely and proper fashion isn’t or shouldn’t be the purchaser’ task. 

There is precedent – in pre-GST laws – that mandates payment of tax by the supplier before the purchaser can claim ITC. Legality apart, what is the policy driving enactment of such provisions? State wants to be secure about its revenue. State’s objective is to obtain tax from the supplier before it provides purchaser ITC on tax paid to the supplier. Documentary evidence of the supply of goods/services and payment of tax is insufficient to provide ITC. The reason is that, at times, the purchaser and supplier collude to make bogus transactions and claim ITC fraudulently. The fear or perhaps experience of allowing bogus ITC claims has resulted in making a statutory provision that places an onerous burden on the bona fide purchasers too. But the Courts have – until now – not engaged in a serious analysis if this similar treatment of all kinds of taxpayers violates Article 14 and whether it amounts to reasonable restriction under Article 19(6).    

Conclusion The Kerala High Court’s decision follows a burgeoning body of judicial precedents that have termed ITC as a concession and subject to statutory conditions. And yet Courts have not been able to cogently analyze as to why ITC cannot, under certain conditions, be termed as a right and not a concession. Neither have the Constitutional arguments based on Fundamental Rights been examined in any methodological fashion. While one may – and it seems to be increasingly the case – may become familiar with provisions imposing onerous demands on taxpayers to successfully claim ITC, it not a certificate of their constitutionality. Neither do the legality of such provisions provide them a stamp of good tax policy. Securing revenues for itself is certainly one of the goals of the State, but tax laws cannot and should not be so designed that they impose increasingly burdensome conditions on the taxpayers before they can claim ITC or similar such benefits under a tax statute.    

Can Cash be Seized During GST Inspections? 

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Section 67 of the CGST Act, 2017 deals with powers of inspection, search, and seizure of officers and Section 67(2) specifically empowers the officers carrying out an inspection to seize goods and documents. Courts have arrived at divergent interpretations as to whether the power to seize goods and documents includes the power to seize cash – unaccounted or otherwise. Relying on the interpretive principle of ejusdem generis and the objective of GST laws, some Courts have held that power to seize goods includes power to seize cash while some Courts – relying on similar factors – have concluded otherwise. 

Short Profile of Section 67

Section 67, CGST Act, 2017 states that where a proper officer not below the rank of Joint Commissioner has reasons to believe that a taxable person has suppressed any transaction in relation to supply of goods or services, or has claimed ITC more than his entitlement or has engaged in the business of transporting of goods in a manner that has caused or is likely to cause tax evasion, he may authorize any officer of central tax to inspect places of business of such taxable person. Section 67(2) along with the two Provisos states as follows: 

Where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things: 

Provided that where it is not practicable to seize any such goods, the proper officer, or any officer authorised by him, may serve on the owner or the custodian of the goods an order that he shall not remove, part with, or otherwise deal with the goods except with the previous permission of such officer: 

Provided further that the documents or books or things so seized shall be retained by such officer only for so long as may be necessary for their examination and for any inquiry or proceedings under this Act. (emphasis added)

The specific question that Courts have have faced is: whether cash is a ‘thing’ and can be seized by officers while carrying out inspections under Section 67? The text of Section 67 does not provide any definitive answer as it does not mention the word ‘money’ and the only way to include money in the scope of Section 67 is through a process of interpretation. While some Courts have relied on the definition of money, as included in CGST Act, 2017, this interpretive approach has not provided a definitive answer to the scope of Section 67 and the power of officers under the said provision.  

Cash is a ‘Thing’ 

The Madhya Pradesh High Court referred to the definitions of ‘consideration’, ‘business’, ‘money’ among others to hold that the term ‘thing’ used in Section 67 includes money. The High Court’s reasoning was that definitions are the key to unlock the objective of CGST Act, 2017. The High Court though never specifically articulated as to what objective of GST laws was served by allowing officers to seize cash belonging to a taxable person. The High Court further tried to reason that a statute must be interpreted in a manner that suppresses the mischief and advances the remedy. Again, here the High Court did not clearly state the mischief and remedy in question. Is the mischief tax evasion? And if so, is it warranted to rely on inconclusive definitions to interpret a provision which provides invasive powers to tax officers?   

The Kerala High Court akin to the Madhya Pradesh High Court also opined that Section 67(2) allows for seizure of cash including things under certain circumstances. However, the Kerala High Court took a different view of the objective of GST and observed that: 

The power of any authority to seize any ‘thing’ while functioning under the provisions of a taxing statute must be guided and informed in its exercise by the object of the statute concerned. In an investigation aimed at detecting tax evasion under the GST Act, we fail to see how cash can be seized especially when it is the admitted case that the cash did not form part of the stock in trade of the appellant’s business.          

The Kerala High Court added that the intelligence officer’s argument that there was huge amount of idle cash at the petitioner’s premises and it wasn’t deposited in the bank reveals the misgivings that officers have of their powers under GST laws. The High Court added that such arguments were only valid if the officer was attached to the Income Tax Department.

The above two decisions show how two High Courts are at odds as to their understanding of the objective of GST. While the Madhya Pradesh High Court reasoned that seizure of cash would serve the object of GST, the Kerala High Court opined that seizure of cash will not serve the purpose of detecting GST evasion especially if it is not part of stock in trade of the taxable person. Both High Courts are at fault in not specifically articulating the object of GST laws. Invoking the ‘object’ of GST laws in abstract and in general terms is not the best interpretive approach and is in fact erroneous. It is not prudent to assume that GST laws have only one objective. One could perhaps argue that inspection and seizure have one overarching objective, i.e., to ensure collection of the tax due and compliance with statutory provisions. But, surely, that is not the ‘only’ object of GST. To argue or even pre-suppose that the only object of GST is to facilitate maximum tax collection is a reductive view of tax laws.  

Further, it is important to highlight that the Kerala High Court casually concluded that Section 67 allows seizure of things including cash without specifically examining the text of the provision and its scope. The principles of strict interpretation of tax statutes were given a complete bypass by the Kerala High Court in observing that cash can be seized under Section 67.  

Cash is Not a ‘Thing’ 

At the other end of spectrum are two decisions of the Delhi High Court. The first case, also discussed here, relied on three major factors to conclude that cash is not included in the term ‘thing’ used in Section 67. The Delhi High Court observed that while Section 67 uses the term ‘goods’ which was a wide term, the caveat in the provision was that they should be liable for confiscation. Goods should be the subject matter or suspected to be subject matter of evasion of tax. Similarly, documents, books or things can be confiscated if in the opinion of the officer they shall be used or are relevant to any proceedings under the Act. 

The Delhi High Court highlighted the drastic nature of the powers of search and seizure and the need to adopt purposive interpretation. The High Court observed that powers under Section 67 have only been given to aid proceedings under CGST Act, 2017 and cash cannot be seized in exercise of powers under Section 67 on the ground that it represents unaccounted wealth. And that unaccounted wealth is the subject matter of IT Act, 1961. 

In the second case, the Delhi High Court also made similar observations and held that if there is no evidence that cash represents sale proceeds of unaccounted goods it cannot be seized under Section 67 of CGST Act, 2017. And that CGST Act does not permit the coercive action of forcibly taking cash from the premises of another person. 

The Delhi High Court’s approach is founded on sounder reasoning as it not only highlights the drastic and intrusive nature of powers of inspection, but also specifically identifies the purpose of these powers. To aid investigation under CGST Act, 2017 cash can be seized but only if represents the sale of unaccounted goods or a related offence under the statute. Cash cannot be seized merely because it is unaccounted income or wealth, which is the subject matter of IT Act ,1961.  

Way Forward 

The Madhya Pradesh High Court’s reasoning to support its conclusion that ‘thing’ includes ‘money’ lacks potency especially because of the High Court’s ignorance of the dictum that tax laws need to be interpreted strictly. By relying on definitions and other provisions, the High Court interpreted the scope of Section 67 which is not ideal. And unlike the Delhi High Court, the Madhya Pradesh High Court did not acknowledge the drastic nature of inspection and seizure powers and how in trying to suppress the mischief of tax evasion it is empowering tax officers beyond what the law specifically states. And any reliance on purposive interpretation is only defensible if the purpose of the statute and/or provision is clearly articulated and the interpretation is to suit that purpose. Reference to abstract objective of the statute is not helpful and leaves a lot to be desired. On balance, the approach adopted by the Delhi High Court – in both its decisions on the issue – is well-reasoned, pragmatic and hopefully will form the bedrock of jurisprudence in future.  

NCLT Cannot Declare an Assessment Order as Void: Kerala HC

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The Kerala High Court in a recent judgment used strong words against an order of NCLT, Kochi Bench for declaring an assessment order passed under KVAT Act as void ab initio. The High Court observed that NCLT did not have the power to declare an assessment as void ab initio and quashed its order. I describe the case below and state whether there was a need for Kerala High Court to use harsh words against NCLT. 

Before I describe the case, it is important to reiterate, for context, that Section 14, IBC, 2016 imposes a moratorium on initiation of any coercive legal action against the corporate debtor. Section 14(1)(a) empowers the adjudicating authority to declare a moratorium for prohibiting the institution of suits or continuation of suits against the corporate debtor including any judgment, decree, or order in any court of law. While Section 33(5), IBC, 2016 states that where a liquidation order has been passed, no suit or other legal proceeding shall be initiated by or against the corporate debtor except with prior approval of the adjudicating authority.   

Facts 

The petitioner, Deputy Commissioner (Works Contract) approached the Kerala High Court impugning an order of NCLT, Kochi passed on 26.10.2022 under Section 33(5), IBC, 2016. 

The company, the corporate debtor, against whom an assessment order was passed was under the liquidation process under IBC, 2016 and was admitted into the Corporate Insolvency Resolution Process (‘CIRP’) on 25.10.2019. The CIRP effected public announcement on 03.11.2019 and a moratorium was declared under Section 14, IBC, 2016 which was to be effective on 02.12.2021, the day on which liquidation order was passed.

For the year 2015-16, the GST Department found certain discrepancies relating to VAT payments by the corporate debtor. For the year 2015-16, the corporate debtor was issued a notice under Section 25, KVAT. The assessment against the corporate debtor was completed via order dated 25.02.2021 and total VAT liability was determined as 11,76,35,626.70/- On a Form-C dated 04.01.2022 the Department claimed the said tax amount before the resolution professional appointed for the corporate debtor under IBC, 2016. 

Against the Form-C application, the corporate debtor filed an application before NCLT, Kochi under Section 33(5), IBC, 2016 seeking permission to prefer an appeal against the order of assessment dated 25.02.2021. 

While the petitioner had filed an application seeking permission to file an appeal against the order of assessment, NCLT, Kochi declared the assessment order as void ab initio. NCLT stated that the assessment order had been passed in violation of the prohibition contained in Section 14(1)(a), IBC, 2016 and directed that the tax claim be considered independently without considering the assessment order passed on 25.02.2021. Against the NCLT’s order, the State approached the Kerala High Court.  

Kerala High Court Expounds on the Law 

The issue before the Kerala High Court was: whether the NCLT is empowered to declare an assessment order as void ab initio under Section 33(5) of IBC? The straightforward answer is no, and the High Court arrived at the same conclusion, but not before it had a few harsh words to say about NCLT, Kochi. 

The law on the interface of tax claims and IBC has been expounded by various judgments, with the Courts on various occasions clarifying the overriding effect of IBC over all other legislations including tax laws. The Kerala High Court relied on two judgments, VM Deshpande case and the Sundaresh Bhatt case. The latter case was decided in the context of interplay of IBC, 2016 and Customs Act where the Supreme Court had clarified that the custom authorities can only determine the tax, interest, fine or any penalties that are due but cannot enforce their claims during the period of moratorium. This was the ratio of VM Deshpande case too, though decided in the pre-IBC period. 

The Kerala High Court relied on the above two precedents to enunciate that the law was that the tax authorities have the limited power to determine the quantum of tax and make assessments, but not enforce its demands. Accordingly, it rightly held that: 

Thus, after declaring the moratorium, there is an embargo on enforcing the demand, but there is no embargo under Section 14, read with Section 33(5) of the IBC, for determining the quantum of tax and other levies, if any, against the Corporate Debtor. (para 5.3) 

Applying the said dictums to the impugned case meant that during the moratorium the VAT assessments could have been finalized against the corporate debtor, but the said tax assessments could not be enforced. And in enforcing the said tax demands, there was a violation of Section 14, IBC, 2016. In seeking permission of NCLT to appeal against the enforcement of the tax demands, the corporate debtor was trying to enforce the law as laid down by Supreme Court in previous decisions. The NCLT went a few steps ahead and declared the tax assessment as void ab initio and non-est in law. A power that it certainly does not possess under any of the relevant provisions of IBC, 2016. NCLT should have merely provided the corporate debtor a permission to appeal, while not commenting on the assessment order per se. The Kerala High Court correctly quashed NCLT’s order and in doing so termed it as preposterous, untenable, and showing a lack of basic understanding of law. (para 6)

Conclusion 

The Kerala High Court correctly interpreted and applied the relevant precedents to the facts of the case. Equally, it was right in terming the NCLT’s order as untenable in law. The High Court in striking down the NCLT’s order also commented on the quality of persons in NCLT and their competence. I’m sure there are more suitable and appropriate channels to address the quality of personnel in NCLT instead of commenting on their legal aptitude in a judgment. I do not agree with NCLT striking down the assessment order and NCLT should have approached the issue in a more considered manner, but the Kerala High Court’s comments on NCLT personnel in the judgment could have been avoided as well.         

Religious Vows and Income Tax Obligations: Harmony to Clash 

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The Supreme Court is currently seized of a matter which, at its core, involves determining to what extent do the religious beliefs of a person exempt them from withholding tax obligations under the IT Act, 1961. In this article, I will focus on the issues involved and refer to the relevant judgments of the Madras High Court – Single Judge Bench and Division Bench, as well as the judgment of a Single Judge Bench of the Kerala High Court, currently under appeal before a Division Bench. The judgments reveal differing opinions and unravel layers of the central dilemma – should interpretation of tax law accommodate personal religious beliefs, or should tax law be indifferent to religious beliefs, irrespective of the hardship it may cause.    

Background 

The controversy involved nuns, sisters, priests, or fathers who provided their services as teachers in schools. The schools were provided grant-in-aid by the State Government under its grant-in-aid scheme. Christian religious institutions/religious congregations (‘societies’) which controlled the schools and represented the cause of the teachers before the High Court(s) contended that the teachers were bound by Canon law as they taken vows of poverty to the Christ. As a result of their vows, the teachers had suffered a civil death, were incapable of owning property and thus their salaries belonged to the society in question. The teachers were obligated to ‘make over’ their salaries to the societies and did not possess any title over them. And it was the society which accounted for the money in its tax returns and not the teachers. In view of the above, the petitioners contended that the salaries of teachers cannot be subjected to deduction of tax at source as stipulated under IT Act, 1961.  

Before I summarise the arguments adopted by the parties, it is vital to understand the successive Circulars and Instructions issued by CBDT on the issue. I’ve summarised the content of each Circular in a chronological fashion.  

Circular No.5 of 1940, issued on 02.01.1940: Medical fees, examination fees or any other kind of fees received by the missionaries are taxable in the hands of the missionaries themselves, even though they are required by terms of their contracts to make over the fees to the societies. The Circular stated that not only does the accrual happen in favor of the missionaries but there is an actual receipt by them. 

Circular No.1 of 1944, issued on 24.01.1944: Cited the principle of diversion of income and noted that the fees received by missionaries is not their income and clarified that where a missionary employee collects fees in payment of bills due to the institution, the amount collected will income of the institution and not of the employee. No income tax will be collected on fees received by missionaries for services rendered by them which as per their conditions of service they are required to make over to the society. 

Circular F. No. 200/88/75-II (AI), issued on 05.12.1977: Referred to the Circular of 1944 and reiterated that since the fees received by the missionaries is to be made over to the congregation there is an overriding title to the fees which would entitle the missionaries exemption from payment of income tax. 

CBDT Letter, F. No. 385/10/2015-IT (B), issued on 26.02.2016: Observed that the Circular of 1944, which was reiterated in 1977, was only applicable on amounts received as fees as payment of bills due to the institutions and does not cover salaries and pensions. And while Circular of 1977 mentions the word ‘salary’, the operative portion only dealt with fees. 

CBDT Letter, F. No. 385/10/2015-IT (B), issued on 07.04.2016: Reiterated the position in previous letter and noted that salary and pension earned by member of congregation in lieu of services rendered by them in their individual capacity are taxable in the hands of members even if same are made over to the congregation. No exemption from TDS is envisaged under the Circulars and Instructions of the Board. 

The shift in stance on TDS obligations, from 1944 to 2016, is evident from a summary of the above Circulars. The shift though was not caused by any substantive change in the underlying law but facts. From 2015 onwards, the teachers were to be paid salaries in their individual accounts via ECS, while previously the grant-in-aid from the State Government was credited as a lumpsum amount to the account of the societies itself. Prior to 2015, no withholding tax was deducted, primarily because that was the interpretation of the 1977 Circular. However, in 2015, before crediting the salaries to individual accounts of teachers, the Pay and Accounts Officer addressed a communication to the Principal Commissioner of Income Tax (Chennai) as to whether tax is to be deducted from salaries of teachers and received a reply in the affirmative, which the societies alleged was contrary to the Circulars issued until then. Nonetheless, it triggered a chain of events which culminated into CBDT Instructions of 2016 which also affirmed that tax should be deducted and thereafter societies filed writ petitions before the Madras and the Kerala High Court challenging the orders of deduction of tax. 

Diversion of Income vis-a-vis Application of Income 

The Revenue’s stance that religious beliefs do not exempt from withholding tax obligations highlighted the apolitical character of IT Act, 1961. And the Division Bench of the Madras High Court agreed with this argument and premised its interpretation of provisions relating to withholding tax partly on that assumption. (paras 29-30) In my view though, the Revenue’s case hinges on the core issue that the salary of teachers which they are bound to make over to the societies is an application of the teacher’s income and not a diversion of income. The petitioners contended otherwise: that the societies had an overriding title on the teacher’s salaries due to their vow of poverty and making over the salaries amounts to diversion of income and not application of income. 

Application of income, under direct tax law, means a person applies the income or spends it on an avenue of his choosing ‘after’ its receipt. This could mean donation of the entire income to another person, transferring a part or entirety of the income to a dependent based on a previous promise or otherwise parting with the income after receiving it. In such cases, since the income is received by the person and is accrued in their favor, it is taxable in the person’s hands. The subsequent application of income for charitable or other purposes is immaterial to chargeability of income in the hands of the person who receives the income in the first place.  

Diversion of income, fully expressed as ‘diversion of income by an overriding title at source’, implies that the person has diverted their income, by a contractual arrangement or otherwise, to another person and never receives the income. It is important that not only does the person not receive the income, but more crucially the accrual does not happen in favor of the person who diverts their income. Diversion of income can happen in various ways. If a person, as part of an employment or professional contract, dedicates a portion of his income to a charity whereby a charity has a right to receive such money every month, it can be said that the person has diverted that portion of their income and created a charge in favor of the charity. The portion of money earmarked for charity neither accrues in the person’s favor nor does it receive that income. The diversion needs to happen at the source of income to create an overriding title in favor of the other person. But, if the contractual terms are such that the entire income accrues in favor of the person and thereafter a portion of income is diverted towards charity, it will not amount to diversion of income but application of income. 

Courts in India have tried to demarcate the two concepts through various decisions. And while an articulation of the concepts is coherent, their application to various fact situations remains a challenge. Courts have, for example, observed that diversion of income happens where third person becomes entitled to receive the amount before an assessee can lay claim to receive it as its income, but no diversion of income happens when it is passed to a third person after receipt of income even if it may be passed in discharge of an obligation. These broad dictums while understandable need to be applied to situations that are rarely straightforward such as the current case involving nuns and fathers who have taken a vow of poverty.     

Have Teachers Diverted Their Income?  

Based on the above summary exposition of application and diversion of income, it is apposite to examine if the teachers who have taken a vow of poverty diverted their income or were they recipients of income which they applied in favor the societies. From a Canon law perspective since the teachers had suffered a civil death and were no longer capable of owning property, the case is that of diversion of income. And the teachers should not be taxable. And as the petitioners argued, the teachers were merely conduits, and the income was that of the societies. But such an approach tends to completely discount or at least dilutes relevance of the provisions under IT Act, 1961. 

The Division Bench of Madras High Court and the Single Judge Bench judgment of the Kerala High Court disagreed with the above line of argument and gave the IT Act, 1961 more primacy. Both the Courts in their respective judgements observed that the societies did not have a legal right to receive the salaries as they accrued to individual teachers. While the precepts of canon law might require the teachers to part with their salaries, it was held that the said obligation was in the realm of personal law and did not entitle the societies to receive salaries from the State Government. It can be said that from the State Government and Revenue’s standpoint, only teachers were entitled to receive the salaries, but from the standpoint of societies teachers were mere conduits to receive the money and the right to receive the money was of societies. The latter view, of course, is based primarily if not entirely on personal law.  

The single judge bench of the Madras High Court – against which a writ appeal was decided by the Division Bench of the Madras High Court – however, said the above conclusion did not give ‘due regard to personal law’ and the Revenue Department cannot ignore the personal law of the teachers. And by applying the test of distinction between diversion and application of income enunciated by Courts in previous decisions, Single Judge of the Madras High Court held that the correct conclusion is that the teachers only receive the salary on behalf of their societies as they do not partake in any part of their income. And no tax should be deducted at the time of disbursal of their salaries.      

The question then is to what extent, if at all, should income tax accommodate the religious beliefs of the teachers? If the religious belief is to be accommodated, the teachers would have to be considered as fictitious persons – and also in accordance with the long-standing practice of the Income Tax Department as per its pre-2016 Circulars – and only societies would be considered recipients of income via a deeming fiction. This would save the teachers – who do not receive any benefits of portion of their income in reality – from income tax obligations of filing returns and claiming refunds, etc. If the societies are accounting in their income tax returns, it should not be a problem as it has not been since 1944. 

What is the case for not accommodating the religious beliefs? One, there is no express provision in IT Act, 1961 that exempts people from withholding tax obligations on the ground of their religious beliefs. At the same time, I would suggest that accrual, which is one crucial basis to determine chargeability of income, may be a more pertinent lens to view this issue. For example, if the salary accrues to the teachers – due to their services provided on basis of their qualifications, as argued by the Income Tax Department – then it can be said that IT Act, 1961 and its withholding tax obligations applies to them, and the teachers are merely applying their income by making it over to the societies under their personal vows. In the alternative, if the accrual happens in favor of societies, then it is a clear case of diversion of income. But can personal religious vows transfer titles in property? Doubtful. Though if the societies can argue – and I’m not sure they have – that the teachers are bound to transfer salaries to them not just because of their personal vows but also under their contractual obligations with the school/societies, there may be room to suggest that diversion of income happens under contractual terms as well, creating an escape from withholding tax obligations. 

Story of CBDT Circulars 

Apart from the above, a sister issue is that of the validity, content, and scope of Circulars. The Income Tax Department has contended before the Courts that the Circulars that were issued under the IT Act, 1922 and do not represent the legal position under IT Act, 1961. Further, it has been argued the Circulars issued before 2016, only clarify the legal position as regards the fees received by teachers in a fiduciary capacity and not the salaries and pensions. For example, while the Circular of 1977 mentions salaries, the operative part of the Circular only refers to fees. The Division Bench of Madras High Court has opined that the Circulars suffer from vagueness, do not refer to the contemporary position such as the requirement of crediting salaries of teachers in their individual bank accounts such via ECS. Further, the Madras High Court in the same judgment has held that the Circulars can only act as a guide to interpretation and are not binding on Courts. And more importantly, the CBDT does not have the power to grant exemptions when the statutory provisions do not permit such exemptions.  

The Single Judge Bench of the Madras High Court opined that the Principal Commissioner of Chennai could not have issued directions to deduct tax by ignoring the previous valid Circulars. But, the Revenue has a persuasive argument in stating that pre-2016 Circulars only refer to fees and not salaries and pensions. The Single Judge of the Madras High Court questioned the validity of 2016 Instructions on the ground it covered the same subject matter as the previous Circulars. While the Division Bench held that the pre-2016 Circulars did not apply to salaries, but only fees. This, again, is a matter of interpretation. A perusal of the Circulars does suggest that the pre-2016 Circulars clarify tax obligations on fee and refer to salaries incidentally. Even if fee is interpreted to encompass salaries, the more crucial fact in my view is that the manner of crediting salaries has changed. Post-2015, teachers are supposed to be paid salaries via ECS in their individual accounts undeniably making them recipients of the income. This fact was not considered in pre-2015 Circulars necessitating issuance of new directions in 2016. Change in facts can change the interpretation of law. I doubt there is much grouse in that argument.  

Conclusion

I think the ‘correct’ answer in this case depends on various parameters and what is accorded due importance. The Single Judge of the Madras High Court invoked Fundamental Rights relating to religion under Article 25 and 26 to support his conclusion in favor of the teachers, while the Division Bench dismissed their relevance to the issue. Similarly, as highlighted above, if personal law is given primary consideration, then the conclusion favors the teachers, while if a strict interpretation of the withholding tax provisions is followed then as the Division Bench of the Madras High Court observed, there is no exemption based on personal religious beliefs. In my view, a deeper look into accrual and by extension diversion and application of income may provide us an insight as to how to satisfactorily resolve this issue. The Single Judge of Kerala High Court, for example, based its conclusion by reasoning that the salary accrued to the teachers who provided service in their individual capacity and not to the societies. The right to receive income is that of the teachers who entrust their salaries to the societies under a personal vow. (para 16) And, this is a fair conclusion and understanding of the arrangement. In fact, this is what the first Circular of 1940 also infers, but in the context of fees. Last, it is worthwhile to underline that the validity of Circulars and Instructions and the interpretation placed on them may ultimately prove to be crucial in determining the fate of this case.       

Section 16, CGST Act is Constitutional: Kerala HC

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The Kerala High Court recently[1] dismissed a taxpayer’s challenge that Section 16(2)(c) and Rule 36(4) of CGST Rules, 2017 were violative of Article 14 and unconstitutional. The High Court ruled that the taxpayer’s challenge was vague, and the impugned provisions did not suffer from the vice of manifest arbitrariness and were not unconstitutional.   

Facts 

The brief facts of the case are: taxpayer was denied ITC under the CGST and SGST Acts on the ground of difference in GSTR 2A and GSTR 3B returns. The Assessing authority levied interest, penalty, and initiated recovery proceedings against the taxpayer. The taxpayer challenged the assessment order and the constitutional validity of Section 16(2)(c) and Rule 36(4).

Section 16(2)(c) states that no registered person shall be entitled to ITC in respect of any supply of goods or services unless the tax charged in respect of such supply has been actually paid to the Government either in cash or through utilization of ITC admissible in respect of such supply. Rule 36(4) states that ITC to be availed by a registered person in respect of invoices or debit notes the details of which have not been furnished by suppliers in GSTR-1 shall not exceed 5% of eligible ITC available in respect of invoices or debit notes the details of which have been furnished by the suppliers. 

Since the judgment didn’t mention in detail the arguments of the parties, it is difficult to decipher the exact ground on which the constitutional challenge was made by the taxpayer. One can only glean the arguments from the Kerala High Court’s reasoning and its conclusion.  

Decision 

The Kerala High Court articulated four reasons to dismiss the taxpayer’s challenge. 

First, the High Court noted that ‘it is settled’ that ITC is a benefit/concession and not a right extended to a dealer. And that ITC can only be claimed by a taxpayer as per the conditions prescribed in the statute. (para 5) And that the State in exercise of its rule making powers can provide additional conditions for availing the concession. This view aligns with recent decisions wherein ITC has been labelled as a concession thereby providing the State ample, if not infinite space, to impose conditions on taxpayers before they can successfully claim ITC.  

Second, the High Court relied on the doctrine of deference to tax statutes, encoded in Indian tax jurisprudence and is dutifully invoked by Courts without scrutinizing the merits of the doctrine. In the impugned case, the High Court noted there was need for judicial restraint before interfering with tax statutes unless the statute was manifestly unjust or glaringly unconstitutional. (para 10)

Third, the High Court rejected the taxpayer’s claims that Section 16(2)(c) and Rule 36(4) of CGST Rules, 2017 were violative of Article 14 on the ground that the argument was vague. The High Court further noted that neither did the provisions discriminate between the purchaser and seller nor were they manifestly arbitrary and were not contrary to Article 14. 

Fourth, the High Court relied on the facts to observe that the taxpayer did not produce tax invoice as required by Section 16 despite various opportunities, nor did it appear for personal hearing and equally did not discharge the burden on a dealer as per Section 155, CGST Act, 2017. Section 155 states that where any person claims that he is eligible for ITC, the burden of proving such claim shall lie on such person. Since the taxpayer did not meet the prescribed conditions under Section 16 and did not provide the documents, the High Court was correct in holding that the taxpayer did not discharge the burden under Section 155. 

Conclusion 

The Kerala High Court’s decision is defensible and cogent when it invokes Section 155 and non-fulfilment of the conditions of Section 16. However, the High Court is on tricky ground when it claims that ‘it is settled’ ITC is a concession. Undoubtedly, some of recent decisions have taken a similar view, but it is ordinarily incumbent on a Court to acknowledge the divergent interpretations and that ITC has not always been interpreted to be a concession. Similarly, the invocation of doctrine of deference to tax statutes, while well-established, needs to be scrutinized as to its relevance if not its merits in constitutional challenges to tax statutes. Surely, there is room to suggest that the doctrine is not holy grail in all constitutional challenges to tax statutes. The High Court was remiss in not paying adequate attention to the aforementioned facets of the reasoning.               

[1] Nahasshukoor v Asst Commr, Second Circle, SGST, Colletorate 2023:KER:69725. 

Kerala HC Clarifies Scope of Authorisation under Section 67, CGST Act, 2017

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In a recent judgment[1], the Kerala High Court clarified that the authorization provided by a Joint Commissioner for inspection, search and seizure could not be in specific terms, but is only granted in general terms. If the criteria of Section 67, Central Goods and Services Act, 2017 and/or relevant State GST legislation were fulfilled, the authorization cannot be assailed to be illegal. 

Facts

Petitioner filed a writ petition assailing the order of seizure as well as the order of confiscation passed by the Joint Commissioner. The search took place in the business premises of M/s Sobhana Jewellery after authorization given by the Joint Commissioner under section 67(2) of the Kerala Goods and Services Tax Act/Central Goods and Services Tax Act (KGST/CGST). During the search of premises, certain gold ornaments were found in a bag belonging to the petitioner which were accompanied by a delivery challan. The delivery challan was for transportation of the gold ornaments from the petitioner to M/s Sobhana Jewellery. The gold ornaments were verified by the officers and some discrepancies were found in the documents because of which the gold ornaments in the bag were seized.    

The petitioner’s objection to seizure of the gold ornaments was that it was the owner of the gold ornaments in question and that the persons who were present in the business premises of M/s Sobhana Jewellery were one of the partners of its firm and one of its employees. And that the authorization granted by the Joint Commissioner under Section 67(2) for search, seizure and inspection was not for seizing its gold ornaments and thus the seizure was null and void. The petitioner’s case, in effect, was that the authorization for search and seizure was regard to business premises of M/s Sobhana Jewellery and not the articles that belonged to them. 

Kerala HC Interprets Section 67

Relevant portion of Section 67(2), CGST Act, 2017 that was the subject of interpretation is as follows: 

Where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer or central tax to search and seize or may himself search and seize such goods, documents or books or things: (emphasis added)

There are two important ingredients that a Joint Commissioner needs to satisfy before granting authorization for search and seizure under Section 67(2): first, the Joint Commissioner must have a reason to believe; second, the authorization must be regard to goods or documents or books or things which will be useful or relevant to any proceedings under the Act. It is latter that is the subject of concern in the impugned judgment. It is evident that the Joint Commissioner cannot anticipate in granular detail the nature and kinds of goods, documents, etc. that the officers will encounter during their search and inspection. Thus, the authorization granted by a Joint Commissioner cannot specify which ones can be seized and which ones cannot. Recognizing the above elements, the Kerala High Court rejected the petitioner’s argument and observed that: 

Authorisation has to be in general terms and cannot be with respect to any specific books, items, things or documents. What is relevant is that while granting authorisation for search and seizure operations, the authority granting such permission, i.e., Joint Commissioner or Officer above the rank of Joint Commissioner, should have reasons to believe that the goods, documents or things hold relevance and are useful in any legal proceedings under the SGST/CGST Act 2017 and the same are secreted at a particular place. (para 5) 

The Kerala High Court added that the authorization cannot be in respect of each and every article, good, etc. The authorization is in respect of the business premises of the assessee. (para 5.2) In stating so, the High Court clarified that if goods, articles, etc. belonging to a person other than an assessee are found in the premises of the assessee and the officers find them to relevant or useful to any proceedings under the KGST/CGST, they can be confiscated. It is not necessary that the title to such seized items should belong to the assessee, the confiscated goods can belong to a third party if they are found in the business premises of the assessee. 

Conclusion The Kerala High Court’s decision is a correct interpretation of the scope of permission granted to officers under Section 67. If the officers were empowered to only seize articles belonging to the assessee whose premises were being inspected, it would reduce the efficacy of the entire exercise. The barrier of them finding the articles ‘relevant and useful’ though remains; but, the scope of this barrier is the subject of another discussion. 

[1] Velayudhan Gold LLP v Intelligence Officer, Intelligence Unit, Kottarakkara TS-561-HCKER-2023-GST. 

Kerala HC Holds ITC Cannot be Denied Due to Difference in GSTR-2A and GSTR-3B

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In a recent judgment[1], the Kerala High Court has aligned with an emerging jurisprudence wherein the High Courts have held that under the GST regime a taxpayer’s ITC cannot be denied merely on ground of difference between GSTR-2A and GSTR-3B. 

In the impugned case, the Kerala High Court expressly noted the ratio of Supreme Court in M/s ECom Gill Coffee Trading Private Limited case[2] and the Calcutta High Court’s judgment in Suncraft Energy Private Limited case[3] to conclude that ITC of an assessee under the GST regime cannot be denied merely on the ground of discrepancy in GSTR-2A and GSTR-3B. It then cited a recent judgment of the Kerala High Court itself in Diya Agencies case[4] where the Kerala High Court had held that: 

In view thereof, I find that the impugned Exhibit P-1 assessment order so far denial of the input tax credit to the petitioner is not sustainable, and the matter is remanded back to the Assessing Officer to give opportunity to the petitioner for his claim for input tax credit. If on examination of the evidence submitted by the petitioner, the assessing officer is satisfied that the claim is bonafide and genuine, the petitioner should be given input tax credit. Merely on the ground that in Form GSTR-2A the said tax is not reflected should not be a sufficient ground to deny the assessee the claim of the input tax credit. The assessing authority is therefore, directed to give an opportunity to the petitioner to give evidence in respect of his claim for input tax credit. The petitioner is directed to appear before the assessing authority within fifteen days with all evidence in his possession to prove his claim for higher claim of input tax credit. After examination of the evidence placed by the petitioner/assessee, the assessing authority will pass a fresh order in accordance with law. (para 8) (emphasis added)

While the Kerala High Court’s 4-page order in the impugned case does not offer much scope for analysis, the primary aim of this blog post is two-fold: first, to record that Courts are increasingly taking the view that a taxpayer’s claim for ITC under GST regime cannot and should not be denied on grounds of discrepancy between GSTR-2A and GSTR-3B. This line of reasoning, if continued, will likely further underline the procedural nature of the former return and that it is only for information purposes and not the only basis of substantive claims. Courts are, until now, taking a reasonable view that ITC cannot be denied or affirmed merely based on information recorded and contained in GSTR-2A. Second, I wish to highlight that while in the impugned case the Kerala High Court relied heavily on the ratio in Diya Agencies case, it is important to highlight that in the latter case the Kerala High Court was expressly dealing with a situation where the taxpayer claimed that it was in possession of genuine invoices and bills that proved that transactions in question were genuine. Accordingly, in Diya Agencies case, the taxpayer was directed to appear before the concerned officer to prove the claim of ITC. While in the impugned case, no such fact was recorded by the Kerala High Court though it is not possible to know for sure if such claim was made by the taxpayer. Going forward, these factual distinctions may prove vital in reinforcing or diluting what is an emerging body of case law as regards the relevance of GSTR-2A in claiming ITC.     

[1] M/S Henna Medicals v State Tax Officer, Second Circle, SGST Department 2023: KER: 55979. 

[2] State of Karnataka v M/S Ecom Gill Coffee Trading Private Limited 2023 SCC OnLine SC 248. 

[3] Suncraft Energy Private Limited v The Assistant Commissioner, State Tax, Ballygunge (2023) 8 TMI 174. 

[4] Diya Agencies v State Tax Officer 2023 (9) TMI 955. 

Kerala HC Accepts Taxpayer’s Plea Against Denial of ITC

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In a crisp judgment[1], the Kerala High Court has held that Input Tax Credit (‘ITC’) cannot be denied to a taxpayer merely because the tax paid is not reflected in GSTR-2A. The Kerala High Court’s conclusion aligns with a recent judgment pronounced by the Calcutta High Court where the taxpayer was provided a similar relief. 

Facts and Arguments 

The issue in this case was that the taxpayer was denied ITC by the Revenue Department on the ground that the amount of ITC claimed did not match the amount mentioned in GSTR-2A. The taxpayer relied on Section 16, CGST Act, 2017 and stated that the provision contained a non obstante clause implying that if the conditions prescribed under the provision were fulfilled by the taxpayer, ITC cannot be denied. 

The taxpayer, as in Suncraft Energy Pvt Ltd case, stated that GSTR-2A is for the purpose of taxpayer facilitation and does not/should not impact the ability of a taxpayer to claim ITC. Taxpayer in this case too stated that CBIC’s press release dated 18.10.2018 clarified that GSTR-2A does not impact a taxpayer’s ability to claim ITC on self-assessment basis under Section 16, CGST Act, 2017. Reliance was placed on Bharti Airtel case[2] for similar purposes.

High Court Provides Relief to Taxpayer 

The Kerala High Court essentially accepted all the arguments of the taxpayer, and interestingly, placed reliance on M/S Ecom Gill Trading Pvt Co Ltd case[3] to state that if the taxpayer has paid the tax amount to the dealer and said tax has not been remitted by the dealer, then the burden of proof as regards remittance of tax is on the taxpayer. However, while in M/S Ecom Gill Trading Pvt Co Ltd case the Supreme Court had held that the taxpayer needs ‘to prove beyond doubt’ the genuineness of the transaction, but, in the impugned judgment the Kerala High Court did not use a similar phrase and instead remanded back the matter to Assessing Officer to examine the taxpayer’s claim of ITC and concluded that: 

If on examination of the evidence submitted by the petitioner, the assessing officer is satisfied that the claim is bonafide and genuine, the petitioner should be given input tax credit. Merely on the ground that in Form GSTR-2A the said tax is not reflected should not be a sufficient ground to deny the assessee the claim of the input tax credit. (para 8)

The Kerala High Court’s judgment is a welcome development on the heels of the Calcutta High Court’s judgment in the Suncraft Energy Pvt Ltd case and ensures that the ITC claims of the taxpayers are not denied on whimsical grounds. Instead, the nature of GST returns are respected to facilitate taxpayer claims. Hopefully, this will provide momentum to a more coherent jurisprudence on this issue in the near future. 

[1] Diya Agencies v State Tax Officer 2023 (9) TMI 955. 

[2] Union of India v Bharti Airtel Ltd and Ors 2021 SCC OnLine 1006. 

[3] State of Karnataka v M/s Ecom Gill Trading Pvt Co Ltd 2023 SCC OnLine SC 248. 

Time Period for Filing Appeals under GST: Kerala HC Adopts Strict Interpretation

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Short Note

In a concise judgment[1], the Kerala High Court dismissed writ petition of a taxable person and held that an appeal under CGST Act, 2017 must be filed before the appellate authority in a time bound manner. The High Court held that the time prescribed for appeal under CGST Act, 2017 must be interpreted strictly. 

Introduction 

The petitioner/taxable person did not file its GST returns in a time bound manner due to COVID-19. The proper officer exercised the power under Section 29(2)(c), CGST Act, 2017 wherein the registration of a taxable person can be cancelled if returns are not filed for a continuous period of six months. The petitioner filed an appeal against the order of cancellation of registration, but after the time prescribed under CGST Act, 2017. Section 107(4), CGST Act, 2017 states as follows: 

“The Appellate Authority may, if he is satisfied that the appellant was prevented by sufficient cause from presenting the appeal within the aforesaid period of three months or six months, as the case may be, allow it to be presented within a further period of one month.” 

Thus, the appellate authority has, in certain cases, the power to extend the time of appeal only by one month after the expiry of initial 3/6 months, whichever is applicable. The taxpayer had filed an appeal even after the additional one month had expired. 

High Court Denies the Claim of Petitioner 

The Kerala High Court relied on a couple of precedents[2] where the Supreme Court while interpreting similar provisions under the Central Excise Act, 1944 had held that the provisions prescribing an outer time limit for filing appeals operated to the exclusion of Limitation Act, 1963. The High Court observed that Section 107(4), CGST Act, 2017 was analogous to the provisions of Central Excise Act, 1944 and concluded that: 

            The Central Goods and Services Tax Act is a special statute and a self-contained code by itself. Section 107 is an inbuilt mechanism and has impliedly excluded the application of the Limitation Act. It is trite, that the Limitation Act will apply only if it is extended to the special statute. It is also rudimentary that the provisions of a fiscal statute have to be strictly construed and interpreted. (para 10)

Accordingly, the High Court dismissed the petitioner’s argument that the Revenue dismissing its appeal against cancellation of registration was arbitrary. 

Conclusion 

The Kerala High Court’s judgment establishes with clarity that the taxpayer is bound to obey the time limit prescribed under CGST Act, 2017 and cannot rely on extraneous factors to extend the time period prescribed for filing appeals before the appellate authorities. In this case, the petitioner was indirectly invoking COVID-19 as an excuse, which was not accepted by the High Court. Further, the High Court, in accordance with the well-established precedents in pre-GST regime held that the Limitation Act cannot come to the rescue of petitioners in extending the time period for filing appeals. CGST Act, 2017, the High Court clarified, operates like a self-contained code for the purpose of time period for filing appeals. Though it would be interesting to observe if the Courts interpret any exceptions to the outer time period if the taxpayer has a genuine hardship and is able to establish it convincingly before Courts.    

[1] Penuel Nexus Pvt Ltd v The Additional Commissioner Headquarters (Appeals) 2023 LiveLaw (Ker) 280. 

[2] Singh Enterprises v Commissioner of Central Excise, Jamshedpur and Others (2008) 3 SCC 70; CCE & Customs v Hongo India (P) Ltd (2009) 5 SCC 791. 

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