Lalwani Ferro Alloys ltd. Vs Assistant Commissioner CGST & high CX (Calcutta High Court)
Calcutta High Court’s Landmark Interim Order: Navigating ITC Denials Amidst Supplier Insolvency – A Detailed Analysis of Lalwani Ferro Alloys Ltd.
Introduction:
The intricate interplay between the Goods and Services Tax (GST) regime and the Insolvency and Bankruptcy Code (IBC) continues to be a fertile ground for legal disputes. In a significant interim order, the Calcutta High Court, in the case of M/s Lalwani Ferro Alloys Ltd. v. Assistant Commissioner, CGST & CX, Park Street Division Kolkata South Commissionerate, GST Bhawan & Ors. (WPA 13913 of 2025), dated July 16, 2025, has provided crucial insights into the complexities surrounding Input Tax Credit (ITC) denials when a supplier undergoes insolvency. This ruling, delivered by Justice Raja Basu Chowdhury, delves into the nuances of Section 16(2)(c) of theCentral Goods & Services Tax Act, 2017 (CGST Act, 2017) and offers vital takeaways for businesses grappling with similar challenges.
Background of the Dispute:
The genesis of the dispute lies in M/s Lalwani Ferro Alloys Ltd. (the petitioner) availing ITC based on GSTR-1 filings made by their supplier, M/s Cosmic Ferro Alloys Limited. The crux of the problem arose when the supplier failed to discharge their GST liability by not filing GSTR-3B returns. This non-compliance was reportedly a consequence of the supplier entering into insolvency proceedings. Consequently, the ITC availed by the petitioner was reversed by the tax authorities, citing the provisions of Section 16(2)(c) of the CGST Act, which mandates that the tax charged on the supply must have been actually paid to the government.
The petitioner, aggrieved by this reversal, challenged the order passed by the appellate authority under Section 107 of the WBGST/CGST Act, 2017, pertaining to the tax period 2017-2018. Their primary contention revolved around the fact that M/s Cosmic Ferro Alloys Limited had undergone a Corporate Insolvency Resolution Process (CIRP) and a Resolution Plan had been duly approved by the National Company Law Tribunal (NCLT) under Section 31 of the IBC, 2016. A pivotal argument put forth by Lalwani Ferro Alloys was that the revenue authorities had failed to lodge any claim with the Resolution Professional during the insolvency proceedings of M/s Cosmic Ferro Alloys Limited. This omission, according to the petitioner, effectively extinguished M/s Cosmic Ferro Alloys Limited’s liability, and by extension, should not impact the petitioner’s legitimate claim to ITC.
Court’s Observations and Interim Directions:
Justice Raja Basu Chowdhury, recognizing the intricate legal questions involved and the significant practical implication of the non-constitution of the appellate tribunal, decided that the writ petition warranted a full hearing. The Court’s interim order is characterized by its balanced approach, aiming to protect the interests of both the revenue and the taxpayer. The key directions issued are as follows:
1.Mandatory Disclosure by Revenue Authorities: The respondents (revenue authorities) have been explicitly directed to disclose all relevant records. Crucially, this includes any steps taken by them to safeguard their interests by lodging a claim before the Resolution Professional during the insolvency proceedings of M/s Cosmic Ferro Alloys Limited. This directive is particularly significant as it probes into the due diligence (or lack thereof) exercised by the tax department in insolvency cases where their revenue claims might be at stake.
2. Petitioner to Furnish Resolution Plan: The petitioner has been instructed to produce the copy of the Resolution Plan approved by the NCLT, Kolkata, in CP (IB) No. 596/KB/2017. This document is central to the petitioner’s argument that the supplier’s liability has been extinguished under the IBC framework, thereby legitimizing their ITC claim.
3. Conditional Stay on Demand: A pivotal aspect of the interim order is the conditional stay granted on the disputed demand. Given that a demand had already been raised and upheld by the original appellate authority, the Court ordered a stay on the demand. This stay is contingent upon the petitioner depositing an additional 10% of the disputed tax amount within four weeks from the date of the order. This 10% is over and above any amount already paid by the petitioner under Section 107(6) of the CGST Act (which typically requires a pre-deposit for filing an appeal). The stay will remain operative until the final disposal of the writ petition or until further orders from the Court, whichever is earlier.
4. Exchange of Pleadings: To facilitate a comprehensive hearing, the respondents have been granted six weeks to file their affidavit-in-opposition. The petitioner will then have four weeks thereafter to file a reply, if deemed necessary.
Key Takeaways for Businesses and Tax Professionals:
This interim order from the Calcutta High Court provides several critical insights and takeaways for businesses, tax consultants, and insolvency professionals:
1.Heightened Due Diligence on Supplier Compliance: The case underscores that merely having a GSTR-1 filing from a supplier is insufficient to guarantee ITC. Businesses must increasingly perform robust due diligence to ensure their suppliers are not only filing GSTR-1 but also diligently submitting GSTR-3B and actually remitting the collected GST to the government. The onus of proving actual tax payment by the supplier often falls on the recipient.
2. Implications of Supplier Insolvency on ITC: This judgment highlights the significant risk posed to a recipient’s ITC when a supplier enters insolvency. Even if the transaction was genuine and tax was paid to the supplier, the subsequent non-remittance by the insolvent supplier can lead to ITC reversal for the recipient.
3. Revenue’s Responsibility in Insolvency Proceedings: The Court’s specific direction for the revenue to disclose whether they lodged a claim with the Resolution Professional is a game-changer. It implicitly suggests that tax authorities may have an obligation to actively participate in CIRP to protect their claims. A failure to do so could potentially weaken their position in later demands against the recipient of the ITC, especially if the supplier’s liabilities are extinguished by an approved resolution plan.
4. IBC Resolution Plan as a Potential Shield: The petitioner’s reliance on the NCLT-approved resolution plan as a basis for immunity from ITC reversal is a crucial legal argument. The final outcome of this case will provide much-needed clarity on the extent to which a successful resolution under the IBC, which may extinguish past liabilities of the corporate debtor, can simultaneously protect the ITC availed by their customers.
5. Challenges of Non-Constituted Tribunals: The case indirectly highlights the practical difficulties faced by taxpayers due to the non-constitution of appellate tribunals. This often forces litigants to directly approach High Courts under their writ jurisdiction, leading to longer resolution times and increased judicial burden.
6. Pre-Deposit for Stay: A Recurring Theme: The imposition of a 10% pre-deposit (in addition to the 107(6) deposit) for a conditional stay is a standard practice in tax litigation. Businesses should factor these financial implications into their dispute resolution strategies.
7. Meticulous Documentation is Paramount: The Court’s demand for specific documents – the revenue’s records of claims in insolvency and the petitioner’s NCLT-approved resolution plan – reinforces the critical importance of maintaining comprehensive and accurate records for both taxpayers and tax authorities in an increasingly complex regulatory environment.
Conclusion:
The Lalwani Ferro Alloys Ltd. interim order is a significant development in the jurisprudence surrounding GST and IBC. Its final resolution will undoubtedly shape future approaches to ITC denials in cases involving supplier insolvency. Businesses must take proactive steps to mitigate risks by enhancing supplier due diligence and staying abreast of the evolving legal landscape. For tax professionals, this case underscores the growing need for expertise at the intersection of tax law and insolvency regulations to effectively advise clients navigating these intricate challenges. The outcome of this writ petition will be keenly watched by the entire business and legal community.
FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT
1.Challenging the order passed by the appellate authority under Section 107 of the WBGST/CGST Act, 2017 (hereinafter referred to as the said Act) for the tax period 2017-2018, the instant writ petition has been filed. Admittedly, the petitioner’s supplier M/s Cosmic Ferro Alloys Limited had declared the supplies made to the petitioner in GSTR 1 but they failed to pay GST on the same by not filing GSTR 3B returns. This resulted in reversal for input tax credit (ITC) availed by the petitioner having regard to the provisions contained in Section 16(2)(c) of the said Act.
2. Mr. Choraria, learned advocate appearing for the petitioner would contend that since, the M/s Cosmic Ferro Alloys Limited had undergone an insolvency process and a resolution plan had been approved under Section 31 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the said Code) by an order dated 11th October, 2018, the petitioner should not be made liable for the infraction of Section 16(2)(c) especially by reasons of the respondents having not lodged any claim with the resolution professional and the liability of M/s Cosmic Ferro Alloys Limited being wiped out.
3. Having heard the learned advocates appearing for the respective parties and noting that the appellate tribunal is yet to be constituted, I am of the view that the writ petition should be heard. The respondents are directed to disclose all records, inter alia, including the steps taken by the respondents to protect its interest by way of lodging claim before the resolution professional, if any.
4. The petitioner is also directed to place before this Court the resolution plan approved by the National Company Law Tribunal, Kolkata in CP (IB) No. 596/KB/2017 on the basis whereof, the petitioner seeks immunity. Since, the demand has already been raised by the respondents and order in original dated 13thDecember, 2023 has been upheld, I am of the view that in the event, the petitioner deposits 10% of the tax in dispute in addition to the amount already deposited with the respondents under Section 107(6) of the said Act, within a period of 4 weeks from date,the demand raised by the respondents in furtherance to the order passed by the appellate authority shall remain stayed till disposal of the writ petition or until further order whichever is earlier.
5. Let the affidavit-in-opposition be filed within a period of six weeks from date. Reply if any thereto, be filed within a period of four weeks thereafter.
6. Liberty to mention.
