Karnataka High Court Rules Transitioned CENVAT Credit in Electronic Credit Ledger Valid for Mandatory Pre-Deposit Under Section 35F in Legacy Service Tax Matters

Case Overview

Case Name: Shakti Enterprises Vs Principal Commissioner of Central Tax (Karnataka High Court)

The Karnataka High Court delivered a significant ruling addressing a critical question at the intersection of the legacy indirect tax regime and the GST framework — whether an assessee can discharge the mandatory pre-deposit obligation under Section 35F of the Central Excise Act, 1944 (as extended to service tax by Section 83 of the Finance Act, 1994) by utilising CENVAT credit that had been transitioned into the GST regime under Section 140 of the CGST Act, 2017 and was reflected in the Electronic Credit Ledger.

The Court answered this question decisively in favour of the assessee, quashing the Tribunal's order that had refused to accept the pre-deposit made through the Electronic Credit Ledger.

Background and Facts of the Case

Shakti Enterprises, a proprietorship concern, was engaged in sorting, blending, processing, and packing of tea for M/s Hindustan Unilever Limited. During the pre-GST era, the assessee had availed CENVAT credit on packing materials in accordance with the CENVAT Credit Rules, 2004.

When the GST regime took effect from 01.07.2017, the assessee, in compliance with Section 140 of the CGST Act, 2017, filed Form GST TRAN-1 to transition the unutilised CENVAT credit into the new system. This transitioned credit was accepted by the Department and duly reflected in the assessee's Electronic Credit Ledger.

Subsequently, an investigation was conducted, resulting in a Show Cause Notice that alleged irregular availment of CENVAT credit and suppression of taxable value. By Order-in-Original No. 04/2023-24 dated 27.12.2023, the Principal Commissioner confirmed the demands raised against the assessee.

Challenging this order, the assessee filed an appeal before the Customs, Excise and Service Tax Appellate Tribunal, Bengaluru (CESTAT). As required under Section 35F, the assessee made a mandatory pre-deposit of Rs. 79,77,301/- by debiting the Electronic Credit Ledger through Form GSTR-3B.

The Dispute: CESTAT's Rejection of the Pre-Deposit Mode

The Tribunal's Registry raised an objection to the mode of pre-deposit. Through Defect Interim Order No. 150/2025 dated 12.12.2025, CESTAT upheld the objection, relying principally on CBIC Instruction F.No. CBIC-240137/14/2022-Service Tax Section-CBEC dated 28.10.2022. The Tribunal held that pre-deposits in legacy matters must be made exclusively through cash payment on the designated CBIC portal, not through the Electronic Credit Ledger. It granted four weeks to the assessee to make good the deposit in the prescribed manner.

Aggrieved by this order, the assessee approached the Karnataka High Court by way of a writ petition.

Section 35F of the Central Excise Act, 1944

The Court examined Section 35F, which mandates the following pre-deposit conditions before an appeal can be entertained: