1. Introduction
The Input Tax Credit is a backbone of GST System and seamless flow of ITC is a soul of this system making it a ‘good and simple tax’. However, after more than six years of its implementation, having nearly 1.4 crore registered taxpayers and progressing monthly collections, this promise of seamless ITC is still subject to many ‘ifs’ and ‘buts’, formulas, interpretation and finally the understanding and mood of the tax officials. Law is still evolving, and continuous changes are making it a roller coaster ride for the taxable person.
2. Issues and controversies
The claim of ITC has to pass through the eligibility tests and conditions of Section 16 read with Rule 36 regarding possession of tax invoice, its auto-population in GSTR-2A / 2B, actual receipt of goods / services, non-restriction of ITC, its actual payment to the government and availment by filing return under Section 39 i.e., GSTR-3B. Also, the payment must be made in 180 days from the date of invoice. Then comes blocks, apportionments and reversals of Section 17 read with Rules 42 and 43. This is further subject to restrictions (99%) laid down in Rule 86B for specified suppliers. Over and above, under Rule 86A, the Commissioner or an authorized officer has the power to block the use of ITC on the basis of suspicion about ‘fraudulently availment of ITC’.
Recently GST authorities have issued a large number of demand notices totalling lakhs of crores to businesses due to inconsistencies in ITC claims for Financial Years 2017-18, 2018-19 and 19-20 based mainly on mismatch of ITC between GSTR-3B with GSTR-2A / GSTR-2B. Among others, one such challenge is the application of Section 16(4) which is proving to be a major burden for the business community at large. Many businessman owing to various reasons could not comply with the provision and hence are now facing huge demand notices.
3. Relevant Provisions
Before we analyse the validity of section 16(4) we through a light on the provisions of section 16. The extracts of the relevant portion of the provisions of section 16 are as under which provides for eligibility criteria and conditions for taking ITC:
Section 16. Eligibility and condition for taking input tax credit.
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,—
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
[(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;]
(b) he has received the goods or services or both.
[Explanation.—
[(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted;]
(c) subject to the provisions of [section 41] [****]], the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be [paid by him along with interest payable under section 50], in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him [to the supplier] of the amount towards the value of supply of goods or services or both along with tax payable thereon.
(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.
(4) 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 [****] debit note pertains or furnishing of the relevant annual return, whichever is earlier.
On a plain reading of the above provisions, it is apparent that taking of Input Tax Credit (ITC) is subject to various conditions enumerated from Sub-Sections (1) to (4). Section 16(4) imposes a condition that ITC cannot be taken after the prescribed time limit. Thus, a limitation is sought to be imposed on claiming of eligible ITC. However, there are certain grounds on which validity of Section 16(4) is required to be tested. In this article, an attempt shall be made to critically examine and test those arguments and grounds.
4. Analysis of Section 16
The conjoint reading of the entire section presents the following picture:
a. Section 16(1) is an enabling provision which gives right to any registered taxpayer to take credit of input tax, which are charged to him and are intended to be used in the course or furtherance of business.
b. Section 16(2) starts with a non obstante clausee. “Notwithstanding anything contained in this section” which is a restrictive section and it says that the RTP has to comply with certain conditions mentioned in clause (a) to clause (d) to be eligible to take ITC. Failing which the credit of ITC shall not be allowed to him.
c. Section 16(3) is again a restrictive section which mentions that if depreciation under Income Tax Act, 1961 is claimed on ITC portion of assets, ITC cannot be allowed for that portion.
d. Section 16(4) requires RTP to follow a time limit to take ITC. Thus, it is also a restrictive section limiting the scope of the enabling Section 16(1).
Now One school of thought argues and holds the belief that since section 16(2) starts with a non-obstante clause it overrides all other provisions of this section and accordingly it also overrides section 16(4), therefore according to this belief ITC can be claimed even after the time limit prescribed in sub-section 16(4) if eligibility conditions of section 16(2) are satisfied. It also holds the belief that ITC is a vested right and therefore depriving the assessee from claiming the ITC will be violative of Article 14, Article 19(1)(g) and Article 300A.
Another school of thought holds the belief that section 16(2) is a restricting provision and the non-obstante clause appended to it gives an overriding power in case there is a conflict. Unless there is a conflict it does not override the other. It does not restrict another restricting provision which is complementary to it. It only overrides the enabling section i.e. 16(1) which entitles the tax payer to claim ITC subject to fulfilment of certain conditions. If it is accepted that section 16(2) overrides section 16(4) then section 16(4) will be futile and otiose. It also holds that ITC is a concession or a benefit and it becomes a vested right only after all the conditions prescribed in the Act or rules including conditions of section 16(4) are satisfied or in other words it becomes a vested right when the claim is free from all the conditions and not before fulfilment of conditions. Hence section 16(2) does not override section 16(4) as it is not in conflict with it and it is also restricting provisions and therefore it is not violative of article 14, Article 19(1)(g) and Article 300A.
The belief and arguments of both sides are required to be tested and analysed on the basis of rules of interpretation and judicial pronouncements.
5. Rules of interpretation
Any law or provisions should be interpreted in the context in which such provision was brought into the Statue and after looking the purpose, object and legislative intent behind it. It should be interpreted in such a manner so as to give a harmonious construction. The statue should be looked upon with the glasses of law maker and with these glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed so as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place. In Reserve Bank of India v. Peerless General Finance and Investment Co Ltd. the Apex Court has laid down the Cardinal Principal of Interpretation.
What is the meaning and scope of non obstante clause
There is a large number of judgments where the hon’ble Supreme Court and High Courts have interpreted the meaning of non obstante clause. In Union of India v. G.M. Kokil and others [[1984] (Supp) SCR 196 = MANU/SC/0210/1984 the Apex Court observed that: “It is well-known that a non obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.”
In R.S Raghunath v. State of Karnataka [AIR 1992 SC 81 = ANU/SC/0012/1992] the Apex Court observed that : “22. On a conspectus of the above authorities it emerges that the non obstante clause is appended to a provision with a view to give the enacting part of the provision an overriding effect in case of a conflict.”
In ICICI Bank Ltd v. SIDCO Leathers Ltd., reported in MANU/SC/2337/2006: (2006) 10 SCC 452, the Apex Court observed that the wide amplitude of a non-obstante clause must be kept confined to the legislative policy and it can be given effect to, to the extent the Parliament intended and not beyond the same and that in construing the provisions of a non-obstante clause, it was necessary to determine the purpose and object for which it was enacted (See page 465-6)
From the above it can be derived as follows:
a) Statutes should be interpreted in light of their entire text, and exception clauses or non obstante clauses should not be interpreted in isolation from the main enacting provision.
b) The purpose of the non-obstante clause must be ascertained with which the legislature has inserted it.
a) Non-obstante clause is employed to give overriding effect to some contrary provision but not complimentary provisions.
b) It is enacted to give the enacting part of the section in case of conflict an overriding effect over the provision of the Act or the contract mentioned in the non-obstante clause.
c) A non-obstante clause must be given effect to, to the extent the Parliament intended and not beyond the same.
From a conjoint analysis of the above judicial precedents, the language of Section 16 and the principles of interpretation of statutes as enumerated above, it is clear that the non-obstante clause in Section 16(2) does not in any manner override or limit the operation of Section 16(3) or Section 16(4) as they are not contradicting, rather they all being restrictive provisions, are basically complementing each other and are limiting the scope and operation of Section 16(1). The basic intent of the overriding effect of Section 16(2) is to diffuse any misuse of the enabling provision contained in Section 16(1) and to specify certain conditions that shall ensure that the credit is taken as per the scheme of the Act and after following proper conditions, rules and regulations. The legislature does not seem to intend that Section 16(4) be made otiose by the application of Section 16(2).
The another school of thought in this matter is that non-obstante clause does not only overrides contrary provisions of this section but it overrides anything or everything contained in the entire section 16 so it overrides section 16(4) even if it is complementary to it. When there are conflicting views then harmonious construction of the two becomes sine qua non to reflect the true intention of the legislature. The intent of the legislature is not to diffuse section 16(4) or made it otiose. The purpose of both the section 16(2) and 16(4) is to achieve the same goal or in other words to ensure that ITC is allowed only after the fulfilment of stipulated conditions, hence they are not contradicting each other and therefore section 16(2) does not override section 16(4).
6. Whether ITC is a vested right – it becomes vested right only after fulfilment of conditions.
The issue whether ITC is a vested right and depriving the taxpayer from claiming the credit thereof would be violative of Article 14, Article 19(1)(g) and Article 300A, accordingly whether the section 16(4) is also violative of these articles has been tested by the judiciary in a number of judgments.
In Eicher Motors Ltd. and Anr vs Union of India and Ors. Etc, (1999) 152 CTR (SC) 273, the Hon’ble Supreme Court of India considered MODVAT Credit as an ‘indefeasible right’. However, it must be understood that this indefeasible right as stated by the Hon’ble Court is created only once the same gets vested and not before that. Once a right gets vested, it cannot be taken away by any authority and then it becomes indefeasible. Any infringement by any person or authority on such rights, can be interfered by the court.
Now it is to be determined whether compliance with Section 16(2) itself makes ITC a vested right or it needs compliance of all other sections and rules. As per the above analysis, it becomes a vested right only after the combined compliance with all the conditions of Section 16 followed by other provisions of the law. After following these conditions if any additional conditions are subsequently imposed on the RTP, it shall get protection from Article 300A of the Constitution of India.
The Hon’ble Supreme Court of India in ALD Automotive Pvt. Ltd. Vs The Commercial Tax Officer & Ors., (2019) 13 SCC 255, while dealing with section 19(11) of Tamil Nadu VAT Act held that “ The input credit is in nature of benefit/ concession extended to dealer under the statutory scheme. The concession can be received by the beneficiary only as per the scheme of the Statute.”
The Apex Court in the case of M/S. TVS Motor Company Ltd. vs The State of Tamil Nadu And Others, 2018 Latest Case law 763 SC, held that “After discussing certain judgments of this Court and other High Courts, the Court has observed that the legal position was that right to claim ITC is not a vested right or an indefeasible right. It is a benefit conferred under the Act in certain contingencies and subject to conditions prescribed in the statutory scheme. Therefore, it is open to the State Legislature to provide for conditions and restrictions while extending the concession. Likewise, it was also necessary for any assessee to claim input credit to fulfill those conditions.”
From the above judgements it can be inferred that ITC eligibility must follow certain conditions, rules and regulations and without it, it does not vest on any RTP. In the instant case, mere compliance with Section 16(2) does not make ITC a vested right for any RTP as it is only one among the many conditions for ensuring eligibility of ITC.
7. Whether Section 16(4) is constitutionally valid –Held Yes.
The issue of constitutional validity of section 16(4) has been examined by various High Courts. At first it was dealt by The AP High Court in the case of Thirumalakonda Plywoods vs AC State Tax dt. 18-07-23 and it held as under:
i) Point No.1: The time limit prescribed for claiming ITC U/s -16(4) of APGST Act/CGST Act, 2017 is not violative of Articles 14, 19(1)(g) and 300-A of the Constitution of India.
ii) Point No.2: Section 16(2) of APGST/CGST Act, 2017 has no overriding effect on Section 16(4) of the said Act as both are not contradictory with each other. They will operate independently.
iii) Point No.3: Mere acceptance of Form GSTR-3B returns with late fee will not exonerate the delay in claiming ITC beyond the period specified U/s 16(4) of APGST/CGST Act, 2017.
Then this issue was dealt with by Patna High Court in Gobinda Construction Company vs Union of India & Others Civil Writ Jurisdiction Case No. 9108 of 2021 dt 08-09-23. The hon’ble HC also upheld the constitutional validity of section 16(4). It out rightly rejected the plea of the petitioner that sub-section (4) of Section 16 imposes unreasonable and disproportionate restriction on the right to freedom of trade and profession guaranteed under Article 19(1)(g) of the Constitution and is, therefore, violative of Article 302 of the Constitution and is in teeth of Article 13 of the Constitution. It also held that the ITC is in the nature of benefit/ concession and it becomes a vested right only if the conditions to take it are fulfilled, free of all restriction prescribed under Sub Section (2) as well as in sub-section (4), hence by no means section 16(4) can be said to be violative of Article 300A.
Thereafter the matter was dealt with by the Chhatisgarh High Court in M/s Jain Brothers vs Other (W.P.(T)No.191/2022) dt 11-12-23 and Calcutta HC in case of M/S. BBA INFRASTRUCTURE LIMITED Vs Sr JOINT COMM OF STATE TAX AND OTHERS [MAT NO. 1099 OF 2023 (I.A. NO. CAN 1 OF 2023) dt 13.12.23], in all such decisions the hon’ble High Courts have upheld the constitutional validity of section 16(4).
Thus all the High Courts have upheld the constitutional validity of section 16(4) but a SLP has been admitted by the hon’ble Supreme Court in the case of Shanti Motors vs Union of India & Others [Diary No(s). 4474/2024] and the order is still awaited.
8. Alternative Argument – ITC is taken in books not in GSTR-3B
The another school of thought claims that ITC is not claimed through GSTR-3B rather it is taken in the books of accounts as self-assessed as books are the primary source of documents which entitles the taxpayer to take the ITC. GSTR-3B if only a facilitator to avail the ITC or it is only a reflection of data so that it gets credited into Electronic Credit Ledger as per section 41, it is therefore belated filing of GSTR-3B does not disentitle the claim of ITC.
It is important to observe the language used in section 16 to have a proper understanding. Section 16(1) uses the words “entitled to take credit”, Section 16(2) uses the words “entitled to the credit” and Section 16(4) uses the words “entitled to take input tax credit”.
This argument was dealt with by the Hon’ble Supreme Court in the case of Union of India vs Bharti Airtel Ltd. [(2021) 131 taxman.com 319 (SC)]. The hon’ble Supreme Court reversed the decision of Delhi HC which allowed the Bharti Airtel to rectify or revise GSTR-3B in the same month in which tax of Rs. 923 CR was paid in cash. The Apex Court held that the rectification in Form GSTR-3B could be allowed only in the month in which the errors are noticed and not in the month to which the error/omission pertains. It the revision of GSTR-3B of same month was allowed the taxpayer would adjust the output tax from ITC and would claim the refund of tax already paid in cash which he had deposited voluntarily.
The Hon’ble Supreme Court agreed with the revenue and observed that every assessee is under obligation to self-assess the eligible ITC under section 16(1) and 16(2) and “credit the same in the electronic credit ledger” defined in section 2(46) read with section 49(2) of the 2017 Act. Only thereafter, section 59 steps in. Hereunder the registered person is obliged to self-assess the taxes payable under the Act and furnish a return for each tax period as specified under section 39 of the Act. The self- assessment could be done even without the common electronic portal as was being done in the past till recently pre-GST regime on the basis of primary records, books of accounts, invoice, receipts of goods or service received required to be maintained and updated from time to time. So far the liability to pay OTL is concerned it is based on the transactions effected during the relevant period giving rise to taxable event. The common portal is only a facilitator to feed or retrieve such information and need not be the primary source for doing self-assessment. The primary source is in the form of agreements, invoices/challans, receipts of the goods and services and books of accounts which are maintained by the assessee manually/electronically. However these are not within the control of the tax authorities, but indeed, that self-assessment and declarations would be any way subject to verification by the tax authorities. The role of tax authorities would come at the time of verification of the declarations and returns submitted/filed by the registered person. Section 41(1) envisages that every registered person shall be entitled to take credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.
Thus the hon’ble Supreme Court has held that the primary source of self-assessment of eligible ITC and OTL is the books of accounts, invoice, agreements, challans or receipts of goods etc., as such the ITC is primarily taken in the books and the GST Portal is only a facilitator to retrieve the data and to credit the ITC into ECL.
Hence on the basis of this judgment it can be argued that the taxpayer has already taken the ITC in its books of account on the basis of self- assessment well within the time prescribed in section 16(4) and therefore filing of belated return i.e. GSTR-3B cannot be a ground for disallowing the claim of ITC.
9. Analysis of other sections to ascertain the meaning of the word “take input tax credit”
Section 16(1) divides the concept of taking ITC into two parts. One is “entitled to take input tax credit” and another is “shall be credited to electronic credit ledger of such person”. Section 41(1) provides that every registered shall be entitled to “avail” eligible ITC, subject to such conditions and restrictions, as self- assessed in his return and such credit shall be credited to his electronic credit ledger. Section 39(1) also provides that return shall be furnished electronically uses the word “availing” of ITC. Section 43A, although deleted from statue, but it provided that the registered person shall validate, modify, or delete the details of supplies furnished by the supplier, in return furnished u/s 39(1). Further the ascertainment of time of supply is also dependent on the date when the same is recorded in the books of account i.e. either invoice issued or payment received. The reporting of output tax liability in the return is an additional compliance.
Thus it is the books of accounts wherein the ITC is first taken, then it is availed in the return filed and then it is credited into the Electronic Credit Ledger on the portal. Thus it is a three staged process and the entitlement is decided at the first stage itself i.e. taking the ITC, which is done in the books of accounts.
Reliance is also placed on the recent decision of Madras High Court in Tvl.Kavin HP Gas Gramin Vitrak vs The Commissioner of Commercial Taxes W.P.(MD).Nos.7173 and 7174 of 2023 and W.M.P.(MD)Nos.6764 and 6765 of 2023 dt 24-11-23. In this judgment the hon’ble court held that since GSTR-2 was not notified which was meant for claiming ITC under Rule 60, therefore in the absence of enabling mechanism the assessee cannot be prejudiced by not granting claim ITC and the order was set aside. The court further held that by not permitting to file the return without payment of tax the GSTN has obstructed the taxpayer from availing the ITC. If the GSTN had provided the option to file the return without payment of tax the dealer would have availed the self-assessed ITC on the online portal. The court quashed the order and directed the respondent to permit to file the manual return whenever the taxpayer is claiming ITC without payment of tax. The court further directed to accept the belated return and to allow the ITC if the return is otherwise in order.
10. Does section 16(2)(aa) have any relation to section 16(4)
This section provides that the taxpayer shall claim the ITC only when the same is reflected in GSTR-2B i.e. after the supplier has furnished the details in his GSTR-1. Now there is a school of thought that this reflection of ITC in GSTR-2B of RTP should also be within the time prescribed in section 16(4). Thus, even when the RTP has taken the ITC in the books within the four corners of section 16(4), he is being debarred from claiming the ITC for the default committed by a third person who is not in control of the RTP. Thus it does not appears logical to think that the legislature had intended to punish the RTP for the default committed by some other person. Further, when the taking of credit in the books of accounts is the primary requirement of the section, it should not be interpreted in a manner to defeat the intent of law.
11. Whether the belated returns filed under Amnesty Scheme are also subject to limitation of section 16(4)
There is another issue wherein ITC is being sought to be disallowed when the belated returns are being filed in pursuance to Amnesty Scheme notified vide Not. No. 03/2023 CT dt 31-03-23 in connection with revocation of cancelled registration. The Central Government had announced an Amnesty Scheme for revocation of registration, cancelled for non-filing of returns and who failed to apply for revocation within the prescribed time, on the condition that the application for revocation is filed before 30th June 2023 after filing of all the pending returns and the due tax is paid.
By way of this notification the Central Government has allowed the RTP to file all the pending returns since inception with payment of due tax and system is also allowing the claim of ITC and pursuant to this the RTP may get his registration revoked. The notification does not provide that for claiming ITC section 16(4) would be applicable. The language used in the notification is “after payment of any tax due”. The word ‘due tax’ should be read in context of section 59, which provides for self-assessment of taxes. ITC is first taken in books of account then availed in return as self- assessed and then it is credited in ECL and similarly output tax is also self- assessed as per books of accounts.
If the legislature would have intended to disallow the ITC in such cases also, it would have made the column inactive in GSTR-3B for claiming the ITC but it did not done so. This would cause a huge injustice to the RTP who are complying with law and has filed the returns in compliance of the said notification after payment of due tax and claiming hard earned ITC. Thus it does not seems to be the intent of the legislature to apply section 16(4) in such cases as the ITC is already taken in the books of RTP and therefore the contention that ITC cannot be claimed in filing of returns does not seems a valid ground.
12. Conclusion
From the above it is concluded that the intention of the legislature is not to take away the ITC by way of inserting section 16(4) which is made eligible after following the broad scheme of law. It cannot be the intention of the legislature to take away from one hand what is given from another hand. The non-obstante clause inserted in section 16(2) does not override provisions of section 16(4). The claim of ITC is a concession or benefit and it becomes a vested right only after all the conditions for its eligibility are fulfilled. The only object is to ensure that ITC is allowed only after all the conditions of act and rules are satisfied.
It is the wisdom of hon’ble Courts to take an appropriate view in the spirit of seamless flow of input tax credit which is the soul of GST otherwise the taxpayers will be put into undue hardship and it will hamper the business to a large extent.
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Disclaimer: The above views, interpretation and conclusions arrived by the author are his personal view. There are possibilities of other views also on this subject matter. So the readers are requested to refer the provision of relevant GST Act/ Rules, notifications and circulars before taking any action on the basis of above write up. The author will not be responsible in any manner.
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