GST ITC Refund on Business Closure: A Comparison of Single Bench and Division Bench Rulings

The case of SICPA, again came to the limelight of the GST (Goods and Services Tax) practitioners or the business owners as the division bench of the Sikkim High Court took a different opinion which went against the ruling of the Single bench of the same high court.

The issue in the case of SICPA India Private Limited revolves around a important question of GST act that whether unutilized Input Tax Credit (ITC) lying in the electronic credit ledger can be refunded upon discontinuance of business, even though Section 54(3) of the Central Goods and Services Tax Act, 2017 (CGST Act) does not specifically recognize business closure as a ground for refund.

The issue reached the High Court of Sikkim where a Single Bench ruled in favor of SICPA, but on appeal, the Division Bench reversed the decision. The two judgments show contrasting interpretative approaches to statutory provisions and their interaction with principles of tax law.

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The Single Bench, presided over by Justice Meenakshi Madan Rai, decided in June 2025 that SICPA was entitled to refund of ₹4.37 crores of unutilized ITC upon closure of its manufacturing unit in Sikkim.

However, the Union of India appealed, and the Division Bench comprising Chief Justice Biswanath Somadder and Justice Bhaskar Raj Pradhan, recently set aside the Single Bench ruling, denying SICPA’s claim.

Facts

The brief facts is that SICPA India, engaged in the manufacture of security inks and solutions, discontinued operations in Sikkim in January 2019 after losing supply orders from its primary customer, the Reserve Bank of India.

It subsequently sold its plant and machinery between 2019 and 2020. At the time of closure, it claimed refund of unutilized ITC amounting to ₹4.37 crores by filing FORM GST RFD-01 under the category “any other”, specifically stating Section 49(6) of the CGST Act.

The Assistant Commissioner (08.02.2022) and the Appellate Commissioner (22.03.2023) rejected the claim, holding that Section 54(3) permits refund of ITC only in two situations: (i) zero-rated supplies made without payment of tax, and (ii) accumulation due to inverted duty structure. Closure of business was not covered. SICPA then approached the High Court, which led to the conflicting decisions of the Single and Division Benches.

Decision of Single Bench

The Single Bench considered SICPA’s claim primarily on the ground that there was no express prohibition against refund in the statute. Justice Rai examined Sections 49(6) and 54 of the CGST Act in detail. Section 49(6) provides that the balance in the electronic cash ledger or electronic credit ledger “may be refunded in accordance with the provisions of Section 54.” Section 54(3), however, restricts refund of unutilized ITC to two specified circumstances.

The Single Bench reasoned that although Section 54(3) limits refund in ongoing business scenarios, Section 49(6) read with Section 54 cannot be interpreted so narrowly as to deny refund upon business closure.

The judgment invoked the principle that tax cannot be retained without authority of law. Thus, where credit legitimately accrued to a taxpayer cannot be utilized due to cessation of operations, retention by the State would be unjust.

The single bench relied on the Karnataka High Court’s decision in Slovak India Trading Co. Pvt. Ltd. (2006), where refund of unutilized CENVAT credit was allowed despite no explicit provision in the rules, since the company had closed operations. The Single Bench analogized that precedent to the GST Act, noting that continuity of legislative scheme suggests that closure refunds should not be denied unless expressly prohibited.

Additionally, the Court dismissed the department’s objection about availability of alternate remedy under Section 112 (appeal to the GST Appellate Tribunal) by invoking Supreme Court rulings that writ jurisdiction under Article 226 can be exercised even when alternative remedies exist, especially where only questions of law arise.

According to the bench, “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.”

Finally, the Single Bench ordered refund of the entire ITC balance, declaring that SICPA was entitled under Section 49(6) after closing the business and that denial would amount to unlawful retention of tax.

Decision of the Division Bench

The Division Bench reversed the ruling of the Single and upheld the Revenue’s stand. It undertook a stricter interpretation of the CGST Act and relied heavily on the Supreme Court’s authoritative decision in Union of India v. VKC Footsteps (India) Pvt. Ltd. (2022).

The Bench noted that in VKC Footsteps, the Supreme Court clarified the scheme of ITC and refunds under GST, holding that refund is not a constitutional right but a matter of statutory prescription. It was stated that the Parliament is free to define the circumstances in which refund can be claimed.

Section 54(3) exhaustively specifies two circumstances in which refund of unutilized ITC is permissible. Any other reading would amount to judicial rewriting of the statute, which courts cannot undertake.

Applying this reasoning, the Division Bench said that Section 49(6) does not create an independent substantive right to refund. It merely states that balances in cash or credit ledgers “may be refunded in accordance with the provisions of Section 54.”

Therefore, refund under Section 49(6) is contingent upon satisfying conditions of Section 54. Since business closure is not one of the situations covered under Section 54(3), no refund can be granted.

The Bench also analyzed the precedents relied upon by the Single Bench. It found Slovak India distinguishable because that case dealt with Rule 5 of the CENVAT Credit Rules under the excise act, whereas the GST statute is different and more specific in its treatment of refund.

Moreover, subsequent decisions such as the Bombay High Court’s Gauri Plasticulture (2019) had expressly rejected refund of unutilized CENVAT credit on closure of business. The Division Bench observed that Slovak India could not be treated as binding precedent under Article 141 since the Supreme Court had dismissed the Revenue’s SLP without declaring law.

The court also took note of Circular No. 125/44/2019-GST, dated 18.11.2019, which lists various kinds of GST refunds. There was no record of refunds for business closures. The Court claimed that this supported the legislative intent to prohibit the acceptance of closure refunds.

The Bench concluded that as business closure is not covered by Section 49(6) or Section 54(3) as a reason for a return, SICPA's claim could not be considered. It clarified that in tax matters, clear statutory language cannot be superseded by equitable considerations, such as preventing the State from being unfairly enriched.

Comparison of two Rulings

The two rulings represent different approaches to the legal interpretation of statutes. The Single Bench took an equity-focused and purpose-driven perspective. It sought at achieving an accord among the content of the statute and more general constitutional precepts, like the prohibition against tax retention without legal justification.

Its logic is pro-taxpayer, making guarantees that accumulated credits remain intact just because a business closes. In the absence of clear legislative acceptance, the Court provided relief by interpreting the statute's silence as the absence of prohibition and drawing comparisons to previous excise act’s precedents.

However, to the contrary, the Division Bench interpreted the provisions. It said that unless specifically indicated, refunds are a product of statute and cannot be given. According to VKC Footsteps, equitable factors are irrelevant for interpreting taxes. The division bench focused more on the pro-state approach, also strictly followed the words of the provisions. It said that when the parliament itself remained silent on the refund of ITC during closure of business.

The purpose of Section 49(6) is an important subject of confusion. According to the Single Bench, it grants a substantive privilege that is contingent only on procedural compliance under Section 54. However, the Division Bench saw it as strictly procedural, meaning that refunds were subject to the substantive requirements of Section 54(3). The latter approach, which is consistent with the Supreme Court's strict understanding in VKC Footsteps, curtails taxpayer rights.

Additionally, precedential reliance varied. The Single Bench focused on the continuity of judicial reasoning in defending credit claims upon closure, drawing on Slovak India and Eicher Motors. However, the Division Bench concluded that repayment on closure has never been statutory recognized under GST, considering further clarifications in Gauri Plasticulture and the limited precedential value of Slovak India.

Impact of the Ruling

When the decision of the single bench of the Sikkim high court granting ITC refund to closed business, everyone celebrated. However, for the taxpayers, the decision of the division bench is heart breaking. The Division Bench’s ruling now stands as binding precedent unless overturned by the Supreme Court.

The decision of the division bench concurs with the Supreme Court’s decision in VKC Footsteps, limiting refund of unutilized ITC strictly to the two circumstances under Section 54(3). For taxpayers, this means that closure of business results in forfeiture of ITC balance, even if legitimately accrued.

This sheds doubt on the GST's assurances of impartiality and easy credit overall. If ITC is a representation of vested rights, then its termination upon closure may be a violation of the rule prohibiting the holding of tax without authorization. However, as the Division Bench points out, since the return is statutory, any extension of the grounds falls under the purview of legislation rather than judicial invention.

There is only a mere possibility that the apex court overturns the decision of the Division bench. As refund issue of closed business required to be analysed by the law makers itself. Unless Parliament amends Section 54 to explicitly provide for closure refunds, taxpayers like SICPA will have to forgo unutilized credits on business discontinuance.

Who will Decide the Future Course - SC or Parliament

As the next remedy to approach the Supreme Court is available to the SICPA, the company will definitely take that route. However, the question is whether they succeed or not. There is no proper answer for that as it’s up to the apex court to take a pro-taxpayer and equitable approach or pro-state and strict statute interpretation approach.

On one hand, the statute is silent on the refund of ITC in cases of business closure. This silence led the Single Bench to interpret that refunds can be granted, since nothing in the law prohibits it. On the other hand, the same silence prompted the Division Bench to adopt a strict and narrow view, holding that since the law does not expressly provide for such refunds, they cannot be allowed. If the legislature intended otherwise, it could have expressly incorporated such a provision.

It is yet unclear how the Supreme Court will handle the matter in light of this difference. If it upholds the Division Bench’s reasoning, taxpayers will be barred from claiming refunds on closure of business.Parliament may need to change the GST Act to specifically allow for such reimbursements if it agrees with the Single Bench.

In the end, the best method to eliminate this ambiguity would be for the legislature to provide clarification through clear and exact writing.

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