Madras High Court Allows ITC by Applying Retrospective Extension under Section 16(5)

Background of the Dispute

In Arunachala Gas Agency Vs Assistant Commissioner, the Madras High Court examined whether the assessee could be denied Input Tax Credit (ITC) on the sole ground of time limitation under Section 16(4) of the CGST Act, 2017, despite a subsequent retrospective amendment by insertion of Section 16(5).

The assessee, a registered dealer under the Goods and Service Tax Act, 2017 (GST Act) and the Central Goods and Services Tax Act, 2017 (CGST Act), challenged an assessment order passed by the Department. Under this order, the Department:

  • Reversed the ITC claimed by the assessee, and
  • Demanded payment of tax, interest and penalty.

The core allegation against the assessee was that the ITC had been availed beyond the statutory time limit prescribed under Section 16(4) of the CGST Act.

When the writ petition came up for hearing, both sides informed the Court that the controversy involved was identical to that considered in a batch of writ petitions decided by a common order dated 17.10.2024 in W.P.Nos.25081 of 2023, etc., batch.

In that earlier batch:

  • The petitioners were registered dealers under the GST law.
  • They had timely filed GSTR‑1 returns.
  • However, due to various genuine hardships, they could not file GSTR‑3B within the prescribed time and, consequently, could not reflect their ITC within the original time limit.

Practical Difficulties Faced by Assessees

The High Court, in the earlier matter, recorded that the assessees had been affected by circumstances such as:

  • Serious financial constraints caused by the COVID‑19 lockdown,
  • Health-related problems, and
  • Fire accidents and other disruptive events.

Due to these factors, their GSTR‑3B returns were delayed, which automatically pushed their ITC claims beyond the time bar stipulated in Section 16(4).

Despite these bona fide difficulties, the Department:

  1. Issued show cause notices proposing reversal of ITC; and
  2. Passed final orders upholding those proposals, demanding tax, interest and penalty solely on the ground of limitation under Section 16(4).

The assessees approached the High Court seeking quashing of such adverse orders.

Key Statutory Developments Affecting ITC Limitation

Between the filing of those earlier writ petitions and their final hearing, important legislative and policy developments took place.

Recommendation of the 53rd GST Council Meeting

At the 53rd GST Council Meeting held on 22.06.2024, the Council recommended:

Extension of the last date for availing ITC on invoices or debit notes covered by Section 16(4) of the CGST Act, for specified financial years.

Specifically:

  • The extension applied in relation to GSTR‑3B returns for FY 2017‑18, 2018‑19, 2019‑20 and 2020‑21.
  • For these years, a deemed deadline of “30.11.2021” was prescribed for the purpose of Section 16(4).

This recommendation was later endorsed through the formal legislative process.

Finance Act (No.2) of 2024 and Presidential Assent

To give effect to the Council’s recommendation, the Central Government included the necessary provisions in the Finance Act (No.2) of 2024, representing part of the financial proposals for FY 2024‑25.

  • The amendments received Presidential assent on 16.08.2024.
  • Pursuant to this, Section 16(5) was inserted in the CGST Act with retrospective effect from 01.07.2017.

Notification and Circular Clarifying the Amendment

To operationalize the new law: