Sikkim HC Rules on ITC Refund at Business Closure

This article is based on the judgement of the Sikkim High Court wherein the Hon’ble Court allows refund of ITC lying in the Electronic Credit Ledger at the time of close of business. I have expressed my views by this article that this ITC is not refundable if the conditions stated in section 54(3) are not fulfilled. By publishing this article the readers may come to know legal position as per my views and may participate in breaking debate.

 WHETHER REFUND OF ITC LYING IN ELECTRONIC CREDIT LEDGER AT THE TIME OF CLOSURE OF BUSINEES SHOULD BE ALLOWED WHEN THE ACCUMULATION OF ITC WAS NOT DUE TO THE REASONS – SUPPLY MADE OUT OF INDIA AND DUE TO INVERTED DUTY STRUCTURE.

In the case latest case the Hon’ble Sikkim High Court allows refund of ITC available in Electronic Credit Ledger at the close of the business. The case in the name of M/S SICPA INDIA PRIVATE LIMITED AND ANOTHER Vs UNION OF INDIA AND OTHERS was held on 10.06.2025.

Facts of the Case

The company applied for refund of ITC as available in Electronic Credit Ledger after close of his business. The company claimed refund of such unutilized ITC balance, in terms of Section 49(6)

of the CGST Act, read with the provisions of Section 54 of the CGST Act, which was refused by the Authorities including the First Appellate Authority. The Appellate forum was of the view that Section 54(3) of the CGST Act was applicable only to the two circumstances mentioned in the said Section and would not extend to refund of unutilized input tax on account of closure of business

Ground of Refund given by the Hon’ble High Court

There is no express prohibition in Section 49(6) read with Section 54 and 54(3) of the CGST Act, for claiming a refund of ITC on closure of unit. Although, Section 54(3) of the CGST Act deals only with two circumstances where refunds can be made, however the statute also does not provide for retention of tax without the authority of law. Consequently, I am of the considered view that the Petitioners are entitled to the refund of unutilized ITC claimed by them and it is ordered so.

Extract of relating Provisions

Section 49(6) –

“49. Payment of tax, interest, penalty and other amounts. —

 ………………………………………………………….

(6) The balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount payable under this Act or the rules made thereunder may be refunded in accordance with the provisions of section 54.

Section 54 –

 “54. Refund of tax. — (1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed:

Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in the return furnished under section 39 in such manner as may be prescribed.”

(ii) Section 54(3) of the CGST Act reads as follows;

“54. ……..…………………………….………………..…………………

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilized input tax credit at the end of any tax period:

Provided that no refund of unutilized input tax credit shall be allowed in cases other than—

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”

Multiple Reasons for accumulation of ITC in the Electronic Credit Ledger at the time of Closure of Business

1.Due to unsold stock of goods

2. The goods were sold out at lesser rate.

3. There may be the case of slump sale

4. There may be the case of heavy discounts.

5.  There may be the reason of purchase of capital goods

The above reasons are just for example and not exhausted.

The Debatable Issue

1.Whether the refund of ITC should be allowed merely on the ground that the ITC was not utilized during the period of business because of the reasons other than reasons as contemplated under section 54 (3) of the CGST Act.

Refund of ITC is allowed under two circumstances under section 54(3) CGST ACT–

1.When the ITC relating to the goods purchased are to be export out of India and

2. When ITC accumulated due to rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies).

My opinion – “Why the Refund of accumulated ITC should not be allowed if the above two reasons are not fulfilled.”

> The GST Law is to collect the tax from the end users.

> The person registered under the GST may utilize the Input Tax against payment of output tax liability but if the goods had not been sold out for any reason, then he shall be treated as end user of that goods and he should not be eligible for claiming the refund of tax against goods purchased.

> If the accumulation of ITC was happened due to the person makes supply at lesser rate for any reason even then the person is not eligible for refund of that accumulated ITC because he has paid tax on the value determined under section 15.

Conclusion 

> The tax is not refundable to the end user except specifically stated under the GST Law. For example, the foreign buyer is eligible for taking refund of tax paid by him.

> The Input Tax Credit available in the Electronic Credit Ledger at the time of close of business should be treated as tax paid by the end user subject to the accumulation of ITC was happened due to the provisions contemplated under section 54(3) of the CGST Act.

> Therefore, the person who has closed his business, should not be eligible for refund of ITC lying in Electronic Credit Ledger on basis of the principle (the end user cannot take refund of tax).

*****

Disclaimer: In this article, I have expressed my opinion without challenging anyone or refuting anything. The readers can accept or reject my opinion at their own discussion.