Sec 16(4) of the CGST Act – Why it may never be struck down
By Rupesh Sharma - On December 22, 2023 6:41 pm - 7 mins read
The Chhattisgarh High Court has, in the case of Jain Brothers v. Union Of India [W.P. (T) No. 191 of 2022] upheld the constitutional validity of Section 16(4) of the CGST Act, which prescribes a time limit to avail the input tax credit in respect of an invoice or debit not for supply of goods or services.
Even before this judgment, the Patna High Court, in the case of Gobinda Construction vs. The Union Of India, and the Andhra Pradesh High Court, in the case of Thirumalakonda Plywoods, And The Assistant Commissioner – State Tax, upheld the constitutional validity of Section 16(4) of the CGST Act.
In my honest opinion, I do not think the courts will be inclined to strike down Section 16(4) of the CGST Act, and the reasons for this are the following:
Section 16(4) Of The CGST Act: Section 16(4) lays down the time limit within which an assessee shall take input tax credit in respect of an invoice or a debit note and reads as under:
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 thirtieth day of November following the end of financial year to which such invoice or note pertains or furnishing of the relevant annual return, whichever is earlier.
Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019.
Vested Right: A key observation of various courts while dismissing the writ petition was that ITC is not a vested right under the statutory scheme of things. It is merely a benefit provided under the act, which can be availed of only upon satisfying the terms and conditions, if any, prescribed under such an act.
The word vested is defined in Black’s Law Dictionary as vested, fixed, accrued, settled, absolute, or complete. Having the character or given the rights of absolute ownership; not contingent; not subject to be defeated by a condition precedent.
Rights are vested when the right to enjoyment, present or prospective, has become the property of some particular person or persons as present interest; mere expectancy of future benefits, or contingent interest in property does not constitute vested rights.
In Webster’s Comprehensive Dictionary the word vested is defined as law held by a tenure subject to no contingency; complete; established by law as a permanent right; vested interest.
The word vest is normally used when an immediate fixed right to present or future enjoyment of a property is created. With the long usage, the word vest has also acquired the meaning of an absolute or indefeasible right. It has a legitimate or settled expectation to obtain right to enjoy the property.
To put it in simple words, the observations made by the Hon’ble Supreme Court in the above mentioned case implies that a vested right is an absolute or complete right. A right that is well established, without any contingencies whatsoever.
B.Is ITC a Vested Right : The following decisions will give clarity on whether ITC is a vested right or merely a benefit provided under the statute:
25. Though above decisions deal with ITC claim related to the concerned State laws, however since concept of ITC is one and the same, those decisions will equally apply to the case on hand. Thus, it is clear that ITC being a concession/benefit/rebate, the legislature is within its competency to impose certain conditions, including time prescription for availing such right and the same cannot be challenged on the ground of violation of Constitutional provisions.
“11. From the aforesaid scheme of Section 19 following significant aspects emerge:
a. ITC is a form of concession provided by the legislature. It is not admissible to all kinds of sales and certain specified sales are specifically excluded. ……………………..”
“9… In law (apart from Rules 41 and 41A) the appellant has no legal right to claim setoff of the purchase tax paid by him on his purchases within the State from out of the sales tax payable by him on the sale of the goods manufactured by him. It is only by virtue of the said Rules – which, as stated above, are conceived mainly in the interest of public – that he is entitled to such setoff. It is really a concession and an indulgence.
“where the statue provides for a right, but enforcement thereof is in several stages, unless and until the conditions precedent laid down therein are specified, no right therein can be said to have vested in the person”
A reading of the above decisions makes it clear that ITC is not really a vested right, it is only a benefit extended under statutory scheme of things.
In other words, ITC is a benefit subject to fulfillment of conditions prescribed in the statute. It can however be said that once the conditions are fulfilled, the tax paid becomes eligible for credit in the form of a vested right. This view was taken by the Gujarat High Court in the case of M/s. SIDDHARTH ENTERPRISES THROUGH PARTNER MAHESH LILADHAR TIBDEWAL VERSUS THE NODAL OFFICER – 2019 (9) TMI 319 and theCalcutta High Court in the case of M/s. BBA INFRASTRUCTURE LTD. vs. SENIOR JOINT COMMISSIONER OF STATE TAX & ORS [MAT No. 1099 of 2023] which stated the following:
“The right of registered person to take ITC under Section 16(1) becomes a vested right only if the conditions to take it are fulfilled, free of restriction prescribe under Sub Section (2) thereof”
Doctrine Of Impossibility: Once it is established that the ITC is not a vested right but only a right conferred upon it by the law, and therefore the act that confers such a right can also lay down the conditions to be fulfilled to avail the benefit of the ITC, it becomes necessary to examine if the conditions so laid down under the act to avail such a benefit are reasonable or not, i.e., such conditions shall not be impossible to perform. The courts have time and again held that an assessee cannot be expected to do something that is impossible for him to do.
Lex Non Cogit Ad Impossibilia, which means the law does not demand the impossible, and Impotentia Excusat Legem, which means a disability that makes it impossible to obey the law can be excused. The courts have time and again applied these legal maxims under different scenarios to conclude that an assessee cannot be denied the benefit of a particular provision or held liable for failing to do an act that is impossible for him to do.
The Tribunal in the case of CC & CCE Vs. Juhi Alloys Ltd. held that a buyer can take steps which are within his control, but he cannot be expected to verify the records of the supplier’s broker to check whether the supplier has paid duty on the goods supplied by him or not. As long as the bona fide nature of the consignee transaction is not doubted, credit should not be denied.
The Hon’ble Jharkhand High Court in the case of CCE., Singhbum Vs. Tata Motors Ltd. 2013 (294) E.L.T. 394 held that it would be most unreasonable and unrealistic to expect the buyer of such inputs to go and verify the accounts of the supplier or to find out from the department of Central Excise whether duty has actually been paid on the inputs by the supplier. No business can be carried out like this, and the law does not expect the impossible.
The courts have expressed similar views in connection with doctrine of impossibility other cases viz.
A.B. Tools Limited v. Commissioner of Central Excise – 2010 (256) E.L.T. 382 (H.P.)
Engineering Analysis Centre of Excellence P. Ltd Vs. CIT [2021] 432 ITR 471 (SC)
Is Section 16(4) of the CGST Act Hit By Doctrine Of Impossibility –
To understand the applicability of the doctrine of impossibility, let us look at a section to which the said doctrine surely applies, i.e., Section 16(2)(c) of the CGST Act.
Section 16(2), which lays down various conditions to avail ITC, begins with a non-obstante clause and outlines the conditions to be fulfilled in clauses a to d to avail ITC of tax paid on input supplies. Clause (c) of the said sub-section requires payment of tax by the supplier for the availability of ITC by the purchaser.
This is a classic example of the doctrine of impossibility, as it denies ITC to a bona-fide purchasing dealer for the default committed by the supplier. It places emphasis on the purchasing dealer to ensure that the supplying dealer remits to the Department the tax so collected from the purchaser.
This is a condition that is almost impossible for a purchasing dealer to adhere to, as a purchasing dealer has no control over the supplier, and therefore, in my view, the constitutional validity of Section 16(2)(c) ought to be challenged in court.
Section 16(4) – To the contrary, Section 16(4) merely prescribes a time limit to avail the input tax credit in respect of an invoice or debit, not for the supply of goods or services.
This clearly is not covered by the doctrine of impossibility, as there are time limits prescribed for a number of things under the act, and an assessee is expected to adhere to the said time limits.
Conclusion: Given the fact that the courts have time and again explicitly stated that input tax credit is not a vested right but merely a benefit conferred upon the assessee by the act, which does not violate Article 14, 19(1)(g) and 300A of the Constitution Of India, andSection 16(4) of the CGST Act not being covered by the doctrine of impossibility as it does not expect an assessee to do what is impossible for him to do, in my view it is unlikely that the courts will be inclined to strike down sub-section 4 of section 16. May be under certain circumstances, the court might grant relief to an assessee based on the facts of the case
Or maybe in the future, there might be a bench that decides to strike it down too. However, until that happens, it is advisable to adhere to the time limits prescribed and not be complacent, assuming that sub-section 4 of Section 16 of the CGST Act violates the articles of the Constitution of India or the scheme of the GST Act and will be struck down. I do not see it happening anytime in the near future.
Rupesh Sharma Advocate practising in Chennai
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