Retrospective Amendment to Section 16(5) Saves ITC Claim for FY 2018-19: Karnataka HC

Doulathray S.Marnoor Vs Deputy Commissioner of Commercial Taxes (Audit)-1 (Karnataka High Court)

The Karnataka High Court partly allowed a writ petition challenging an adjudication order passed under Section 73(9) of the CGST/KGST Acts for the financial year 2018-19, wherein the petitioner’s Input Tax Credit (ITC) claim had been denied under Section 16(4) of the CGST Act, 2017. The petitioner, a government contractor registered under the GST laws, had filed statutory returns for the assessment year 2018-19. Following an audit conducted by the respondent authority, an audit report dated 28.04.2023 alleged short payment of tax, ineligibility of ITC under Section 16(4), interest liability, and GST liability on royalty payments to the Government.

Based on the audit report, a show cause notice dated 04.12.2023 was issued proposing determination of tax, interest, and penalty under Section 73 of the CGST/KGST Acts. The petitioner submitted a detailed reply on 04.01.2024 explaining the factual and legal position and specifically relied upon the insertion of Section 16(5) of the CGST Act, 2017 to contend that denial of ITC was unsustainable. According to the petitioner, the respondent failed to consider the reply and mechanically passed the adjudication order dated 22.04.2024 confirming the proposed demand.

The High Court noted that the issue had already been considered by a coordinate bench in W.P. No. 6883/2026. The Court referred to Circular No. 237/31/2024-GST dated 15.10.2024 issued by the Central Board of Indirect Taxes and Customs, which clarified the implementation of sub-sections (5) and (6) of Section 16 of the CGST Act. The Circular stated that Section 16(5) had been inserted retrospectively with effect from 01.07.2017 through the Finance (No.2) Act, 2024, thereby overriding the earlier time restriction prescribed under Section 16(4) for financial years 2017-18, 2018-19, 2019-20, and 2020-21.

The Court observed that Section 16(5) begins with a non-obstante clause overriding Section 16(4). It further noted that claims of ITC availed through GSTR-3B returns filed up to 30.11.2021 would be permissible under the retrospective amendment. Since the petitioner had filed the relevant return on 28.10.2019, the filing was within the extended time allowed under Section 16(5).

In view of these developments, the High Court held that the impugned adjudication order dated 22.04.2024 could not be sustained. The Court quashed the order and remitted the matter back to the respondent authority to the stage of reply to the show cause notice. The respondent was directed to examine the factual eligibility of the ITC claim but was restrained from revisiting the permissibility of claiming ITC within the extended timeline under Section 16(5). All other contentions were left open.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

This writ petition under Article 226 of the Constitution of India is filed seeking for the following reliefs:

A) Issue a writ of certiorari or any other appropriate writ, order or direction quashing the adjudication order dated 22.04.2024 passed under Section 73(9) of the CGST/SGST Act by the respondent for the tax period April 2018 to March 19 produced as Annexure-D;

b) Direct the respondent in the events of remand to conduct de-novo adjudication strictly in accordance with law, after issuing a specific notice of personal hearing granting the petitioner reasonable opportunity to produce documents and make oral and written submission and by duly considering the applicable statutory provisions including Section 169(5) and the binding judicial precedents/orders of this Hon’ble Court and the Hon’ble Supreme Court;

c) Pass such other and further orders, including interim orders as this Hon’ble court may deems fit in the facts and circumstances of the case, in the interest of justice and equity.

2. Heard the learned counsel for the petitioner and learned Additional Government Advocate on behalf of the respondent.

3. The petitioner claims to be Contractor executing Government works and registered under the provisions of KGST and CGST Acts bearing GSTIN No.29AHSPM2041C1ZE. For the assessment year 2018-19, the petitioner filed his statutory returns. An audit was conducted by the respondent for the financial year 2018­19 and a audit report dated 28.04.2023 was submitted alleging short payment of tax and holding that petitioner is ineligible for Input Tax Credit (ITC) under Section 16(4) of the Central Goods and Services Tax Act, 2017 (for short, the ‘CGST Act, 2017’) interest liability and GST on royalty paid to the Government. It appears that based on the said report, the respondent has issued show cause notice on 04.12.2023 proposing determination of tax, interest and penalty under Section 73 of the KGST/CGST Acts, 2017 and the petitioner had filed a comprehensive reply for the show cause notice on 04.01.2024, explaining the factual and legal position and also bringing to the notice of the competent authority about insertion of Section 16(5) of the CGST Act, 2017 and accordingly had contended that denial of ITC was untenable. According to the petitioner, without appreciating the reply given to the show cause notice and without considering the insertion of Section 16(5) of the Act, 2017, the respondent has passed the impugned order dated 22.04.2024 under Section 73(9) of the CGST/KGST Acts, 2017 and has mechanically confirmed the proposed demand of tax, interest and penalty. It is under these circumstances, the petitioner is before this Court.

4. The question that arises for consideration in this writ petition has been considered by the Co-ordinate Bench of this Court in W.P.No.6883/2026, disposed of on 11.03.2026. In paragraph Nos.5 and 6 of the said order, it is observed as follows:

“5. It is pertinent to note that the Central Board of Indirect Taxes and Customs vide Circular No.237/31/2024-GST dated 15.10.2024, issued to all Principal Chief Commissioners/Chief Commissioners/ principal Commissioners/ Commissioners of Central Tax (All) and Principal Director General/Directors General (All) has clarified the issues regarding implementation of provisions of sub-section (5) and sub-section (6) in section 16 of CGST Act, 2017. The Circular clarifies that sub-section (5) of Section 16 has been inserted retrospectively with effect from 01.07.2017 vide Finance (No.2) Act, 2024, thereby overriding the earlier time restriction prescribed under sub-section (4) of Section 16 in respect of the financial years 2017-18, 2018-19, 2019­20 and 2020-21. Subsection (5) to Section 16 was inserted by the Finance (No.2) Act, 2024, with retrospective effect from 01.017.2017. In pursuant thereof, the Ministry of Finance (Department of Revenue) Central Board of Indirect Taxes and Customs, issued Notification No.17/2024-Central Tax, dated 27.09.2024, followed by Circular No. 237/31/2024- GST dated 15.10.2024 providing clarification regarding the implementation of the said provision. The aforesaid legislative development by insertion of sub-section (5) to Section 16 through Finance (No.2) Act 2024, read with the clarification, affirms that claims of Input Tax Credit (ITC) availed through GSTR-3B returns filed up to 30th November 2021 shall be permissible. The relevant extract is reproduced hereunder:

“Reference is invited to sub-section (5) and sub-section (6) of section 16 of the Central Goods & Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) inserted in section 16 of the CGST Act, with effect from the 1st day of July, 2017, vide section 118 of the Finance (No. 2) Act, 2024, whereby the time limit to avail input tax credit under provisions of sub-section (4) of section 16 of CGST Act has been retrospectively extended in certain specified cases.”

6. It must be noticed that Section 16(5) was inserted by way of an amendment by Finance Act (No.2), 2024. The said clause is a non-obstante clause, as it states, “notwithstanding anything contained in sub­section (4)”. If that were to be so, in light of the petitioner having claimed ITC with respect to the financial year 2018-19, by virtue of Section 16(5), petitioner’s entitlement would be extended till 30.11.2021, whereas the return of the petitioner was filed on 28.10.2019. The return filed is within the extended time prescribed under Section 16(5).”

5. In view of the aforesaid, the impugned adjudication order at Annexure-D dated 22.04.2024 passed by the respondent cannot be sustained. Accordingly, the following order:

i) Writ petition is partly allowed.

ii) The impugned adjudication order passed by the respondent at Annexure-D dated 22.04.2024 for the financial year 2018-19 is quashed and the matter is remitted to the respondent to the stage of reply to the show cause notice.

iii) The petitioner is directed to appear before the respondent on 29.04.2026.

iv) It is needless to state that the respondent authority shall look into the factual aspects of eligibility of claim of ITC, but not to revisit the permissibility of claiming ITC by virtue of extended time under Section 16(5) of CGST Act, 2017 in the light of the orders passed in W.P.No.6883/2026.

v) All other contentions left open.