SICPA India Private Limited, engaged in the production of security inks and solutions, was registered under GST in Sikkim. In January 2019, the company decided to shut down its operations in Sikkim. Following this decision, it sold its machinery and manufacturing assets between April 2019 and March 2020. At the time of these sales, SICPA duly reversed the applicable Input Tax Credit (ITC) in accordance with the GST laws.
At the time of winding up operations, an unutilized ITC balance of ₹4.37 crore remained. The company applied for a refund of this balance under Sections 49(6) and 54 of the CGST Act, 2017. However, the tax department denied the refund.
SICPA appealed to the First Appellate Authority (FAA), which upheld the denial, reasoning that:
- A reading of Sections 54 and 29 of the CGST Act suggests no provision exists for a refund of unused ITC due to business discontinuation or closure.
- Section 54(3) permits refunds of unutilized ITC only in two clearly defined scenarios—zero-rated supplies (ZRS) and inverted duty structures (IDS)—which do not include business closure.
Sikkim HC Decision – Will It Stand the Test of Time?
Challenging the FAA’s decision, SICPA filed a writ petition before the Sikkim High Court.
Under Section 49, the CGST Act outlines the mode of settling taxes, interest, penalties, and other dues. Specifically, Section 49(6) allows for the refund of remaining balances, subject to the conditions in Section 54.
The appellate body had earlier ruled that Section 54(3) restricts refund eligibility solely to ZRS and IDS. Consequently, they argued that ITC refunds for closure of business are outside its scope.
The Division Bench (W.A. No. 02 of 2025, order dated 5 September 2025) specifically held that perceived hardship cannot justify judicial expansion of refund entitlements beyond what the statute expressly provides, thereby, The Sikkim High Court Division Bench has overturned the earlier single judge ruling.
Relevant Precedent: Slovak India Trading Co. Pvt. Ltd. Case
Reference was made to Slovak India Trading Co. Pvt. Ltd., where the Karnataka High Court, interpreting Rule 5 of the CENVAT Credit Rules (pertaining to CENVAT credit refunds), upheld a refund for unused credit at the time of business closure.
The CESTAT had earlier allowed the refund, ruling that the closure of business could not invalidate such a claim, a view affirmed by the High Court which found no express prohibition in the rules.
Drawing a parallel, it was argued that Sections 49(6) and 54 (including 54(3)) of the CGST Act similarly lack an explicit restriction against granting ITC refunds upon closure of business.
The Sikkim High Court, therefore, concluded that in the absence of legal prohibition and given the right to not retain tax without authority, SICPA was entitled to its refund claim.
Opposing View in Another HC
In contrast, the Bombay High Court, in Gauri Plasticulture Pvt. Ltd. vs. Union of India (2019), took a stricter stance. It ruled that when manufacturing activities cease, unused CENVAT credits cannot be refunded and must either lapse or be reversed.
This judgment overruled earlier liberal decisions such as Slovak India, emphasizing that the GST regime required ITC reversal or lapse on closure, and not refund.
Our View
The Sikkim High Court permitted refund of unutilized ITC on business closure by relying largely on the Slovak India precedent, emphasizing that the CGST Act does not bar such refunds explicitly under Section 49(6) read with Section 54.
However, the single bench in Sikkim HC did not consider the Supreme Court’s ruling in Union of India vs. VKC Footsteps India Pvt. Ltd., where it was held that:
- Refund entitlements arise solely from statute, not from constitutional rights.
- Parliament has intentionally limited ITC refunds under Section 54(3) to two specific instances: ZRS and IDS.
Moreover, the Constitution Bench in Commissioner of Customs (Import) vs. Dilip Kumar & Co. ruled that any ambiguity in exemption provisions should be resolved in favour of the Revenue. It underscored that the burden of proving exemption lies with the taxpayer and such provisions should be interpreted narrowly.
Conclusion
The Division Bench emphasized Supreme Court precedent in VKC Footsteps, reiterating that refund entitlement is statutory, not equitable, and courts cannot extend such rights in absence of clear legislative support. This ruling is of high relevance to GST practitioners, businesses considering closure, and litigation strategists in the GST context.
This article was first published in KSCAA journal
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