Half-Cooked Precedent on ITC Refund after Business Closure?
W.P.(C) No. 54 of 2023
1. Factual and Procedural Snapshot
| Item | Detail |
| Petitioner | SICPA India (P) Ltd. — manufacturer of security inks; permanently closed its Sikkim plant in 2019 |
| ITC in dispute | ₹ 4.37 crore lying in Electronic Credit Ledger (“ECL”) |
| Statutory pathway pursued | Refund application → rejection 08-02-2022 → appellate dismissal 22-03-2023 → writ petition |
| High-Court holding | Ordered cash refund with interest, saying Section 49(6) & 54(3) contain “no express prohibition” against refund on closure |
ITC Refund after Business Closure?
2. Core Reasoning of the Court
- Section 49(6) is an independent refund-enabling provision; it authorises refund of any ledger balance “in accordance with section 54”.
- First proviso to Section 54(3) is couched as a condition for specified cases—zero rating & inverted structure—but not as a bar to other cases.
- Article 265 principle: retention of the unutilized credit after cessation of business is unjust enrichment of the State.
- Alternate appellate remedy under Section 112 was no bar, since pure questions of law were involved.
3. Six Major Blind Spots — Why the Ruling Is Half-Cooked
| # | Blind spot | Consequences | Key Authorities ignored |
| 1 | Negative-opening language in Section 54(3) (“no refund … shall be allowed except”) was treated as permissive, not prohibitory. | Violates the rule that a negative phrase in a taxing statute is exclusionary, not illustrative. | VKC Footsteps (SC) |
| 2 | Sections 18(4) & 29(5) + Rule 44 mandate reversal and lapse of ITC on cancellation; Court did not discuss them. | Omits the legislatively chosen consequence for business discontinuance. | Bare Act; Gauri Plasticulture (Bom HC LB) |
| 3 | Supreme-Court line that ITC is a concession (not a vested right) left unaddressed. | Undercuts the doctrinal basis for treating ITC as encashable property. | Jayam & Co; ALD Automotive |
| 4 | Precedential hierarchy: relied on Slovak India but ignored Bombay LB & SC authority. | Creates an intra-High-Court conflict and weak stare decisis value. | Gauri Plasticulture supra |
| 5 | Legislative history: GST inserted a closed list precisely to shut the CENVAT controversy; Court never applied the mischief rule. | Misreads Parliament’s conscious policy shift. | Statement of Objects & Reasons, GST Bill (2016) |
| 6 | Policy & anti-evasion concerns (fake credit-and-exit schemes) not analyzed. | Judgment may facilitate cash-out frauds. | GST Council minutes (17th & 22nd meetings) — not cited by Court |
4. Detailed Jurisprudential Critique
4.1 Textual Priority — Generalia Specialibus and the Negative Proviso
- Section 54(1) is generic (“tax or any other amount”); Section 54(3) specifically regulates refund of credit.
- The first proviso’s negative form converts it into a statutory embargo, not a mere eligibility filter. The Supreme Court in VKC Footsteps held that the proviso is a “restriction” on refund jurisdiction.
4.2 Reversal-and-Lapse Regime
- Section 18(4): on cancellation/transfer, taxpayer must pay or reverse credit proportionate to stock and capital goods.
- Section 29(5): balance in the ledger “shall lapse”. Parliament deliberately chose lapse, not refund.
4.3 Nature of ITC — Conditional Concession
| Supreme-Court dictum | Extract |
| Jayam & Co. (2016) | ITC is a “concession claimable only to the extent the statute permits.” |
| ALD Automotive (2018) | Time limits and forfeitures are intra vires; credit is not property. |
| TVS Motor (2019) | Reinforces concessionary nature (not cited in Sikkim HC). |
4.4 Contrasting Excise-Era Precedent
The Bombay LB in Gauri Plasticulture held that cash refund of unutilized CENVAT credit on factory closure is impermissible, overruling Slovak India. The ratio rests on wording identical to GST’s negative proviso.
4.5 Constitutional Dimension
Article 265 guards against illegal levy, not against the State declining to subsidies an exited taxpayer. The Sikkim Court’s reliance on Hindustan Zinc conflates tax retention with non-encashment of a concession.
5. Comparative Table — SICPA versus Established Law
| Issue | Sikkim HC’s view | Supreme Court / Larger Bench view | Comment |
| Proviso to Section 54(3) | Merely sets conditions | Operates as restriction (VKC, 2021) | Apex view binding |
| Section 49(6) scope | Self-sufficient refund power | Subordinate to Section 54; cannot override limitations (VKC, Jayam) | Sikkim HC mis-reads |
| Treatment on closure | Refund permissible | Reversal + lapse (text of Section 18, 29; Gauri Plasticulture) | Conflict |
| ITC nature | “Vested right” | Statutory concession (Jayam, ALD Automotive) | Conflict |
6. Practical Fallout if SICPA Is Followed Nationally
- Revenue risk: Encourages “build credit & exit” fraud models.
- System design: GSTN refund module would need overhaul; Rule 44 logic collapses.
- Litigation surge: Every omitted ground (merger, slump sale, natural calamity) could be litigated as “not expressly barred.”
7. Likely Trajectory on Appeal
- Maintainability: Revenue will argue alternate remedy under Section 112; though discretionary, SC often frowns on writs bypassing the appellate chain.
- Merits: Expect heavy reliance on VKC, Jayam, Gauri Plasticulture, Section 18 & 29, and anti-evasion policy.
- Probability: Given binding SC dicta on the restrictive nature of Section 54(3), reversal of the Sikkim ruling appears more than likely.
8. Advisory Takeaways for Practitioners
- Plan exits assuming no cash refund; budget for Rule 44 reversal cost.
- Demerger/Hive-off routes may preserve credit through ITC transfer (Rule 41) — a safer alternative than staking everything on SICPA.
- Watch the appeal (likely SLP Diary No. — to be allotted). Until the Supreme Court speaks, SICPA is jurisdiction-specific and vulnerable.
9. Conclusion
By downplaying mandatory “reverse-and-lapse” provisions and ignoring binding Supreme-Court authority on the concessionary nature of ITC, the judgment stands on thin ice. Unless Parliament re-opens Section 54(3), or the Supreme Court overturns VKC Footsteps, refund of unutilised ITC on business closure remains legally unsustainable.
About the Author & Office Locations
CA Navjot Singh is a seasoned indirect-tax specialist with deep expertise in Customs, Foreign Trade Policy and GST. He delivers strategic advisory and hands-on execution to conglomerates, Fortune 500 companies and high-growth enterprises.
- Key architect of long-term retainership models that pre-empt audit objections and mitigate litigation risk.
- Designs India-wide GST frameworks that optimise tax and cash-flow while dovetailing cross-border VAT regimes (EU VAT, GCC VAT).
- Advises clients through assessment proceedings, prepares robust submissions and representations, and drafts precise replies to show-cause notices, audit objections and spot memos.
- Represents taxpayers before adjudicating authorities, the Tribunal, the Sales-Tax Revisionary Board and the West Bengal Taxation Tribunal.
- Conducts comprehensive GST-impact assessments, incentive-scheme evaluations and cash-flow modelling; recommends mitigation strategies as benefits phase out.
- Prepares advance-ruling applications and engages with GST-Council committees to shape interpretative guidance.
- Develops end-to-end dispute-resolution roadmaps, from pre-litigation negotiation to
appellate and judicial forums.
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