Madras High Court Quashes Rejection of Rectification Application, Directs Merit-Based Hearing on Section 16(5) ITC Claim — Tvl. Sri Balaji Metal Trading Vs Deputy State Tax Officer

Background and Overview

The Madras High Court recently pronounced a common order disposing of two writ petitions arising out of a disputed assessment and a subsequent rectification proceeding under the Tamil Nadu Goods and Services Tax Act / Central Goods and Services Tax Act, 2017. The case revolved around the interplay between Section 16(4) and the retrospectively inserted Section 16(5) of the TNGST Act / CGST Act, 2017, and whether an assessee who had already deposited tax demand amounts could claim a refund following a beneficial legislative amendment.

The matter before the Court concerned an assessment order dated 15.08.2024, under which a portion of the demand was linked to ITC restrictions imposed by Section 16(4). The petitioner — Tvl. Sri Balaji Metal Trading — contended that following the insertion of Section 16(5) by the Finance (No.2) Act, 2024 [Act No.15 of 2024], dated 16.08.2024, with retrospective effect from 01.07.2017, the amount already deposited was entitled to be refunded. The High Court, after considering the submissions of both sides, found merit in the petitioner's grievance regarding the summary rejection of the rectification application and directed a fresh hearing on merits.

Facts of the Case

Assessment and the Section 16(4) Demand

Tvl. Sri Balaji Metal Trading was subjected to an assessment order dated 15.08.2024. The total demand raised in that order amounted to Rs. 7,23,584/-, out of which a sum of Rs. 2,98,748/- was attributable to the ITC disallowance arising under Section 16(4) of the TNGST Act / CGST Act, 2017.

Section 16(4) prescribes that a registered person shall not be entitled to claim input tax credit in respect of any invoice or debit note for the supply of goods or services after the due date for furnishing the return for the month of September following the end of the financial year to which such invoice or debit note pertains, or the date of furnishing of the relevant annual return, whichever is earlier.

The assessee had already deposited the said sum of Rs. 2,98,748/- on 12.09.2022 and 16.09.2022, prior to the assessment order being passed.

Retrospective Amendment via Section 16(5)

A pivotal development in this matter was the enactment of the Finance (No.2) Act, 2024 [Act No.15 of 2024], dated 16.08.2024, which inserted Section 16(5) into the TNGST Act / CGST Act, 2017, with retrospective effect from 01.07.2017.

The newly inserted Section 16(5) provides that, notwithstanding anything contained in Section 16(4), in respect of any invoice or debit note pertaining to the supply of goods or services or both for the financial years 2017-18 to 2020-21, a registered person shall be entitled to avail input tax credit in any return filed under Section 39 of the Act, up to 30th November 2021.