Legal Interpretation of Section 16 of the CGST Act

[Kamal Aggarwal]

Section 16(2) has overriding effect on Section 16(4) as Section 16(2) has been drafted in a manner which shows clear legislative intent that it is not subject to Section 16(4). This was held in a recent judgement by hon’ble Madhya Pradesh High Court in the case of M/S ANAND STEEL (TRADE NAME) (PRO. SHRI JAGDISH KUMAR MANSUKHANI) , M/S DIGIANA INDUSTRIES PRIVATE LIMITED, M/S VITAL TRENDS PRIVATE LIMITED, M/S DOSHI AGENCY (TRADE NAME) (PRO. SHRI PRAVEEN KUMAR PARIKH) , M/S EKTA ENTERPRISES TRADE NAME (PROP. SHRI SURESH KUMAR MANSUKHANI) , M/S ARIHANTAM INFRAPROJECTS PRIVATE LIMITED, M/S UB INFRASTRUCTURE (PROP. VIKARAM ANJANA HUF) , M/S MODERN RETAIL (TRADE NAME) (PROP. SAPNA CHANDNANI) , M/S SAWRIYA CONSTRUCTION (PROP. JITENDRA SINGH SAWNER) , VERSUS UNION OF INDIA AND OTHERS AND M/S SHREENATH AGRO ENTERPISES, M/S ABDUL PARVEJ KHAN CONTRACTOR VERSUS UNION OF INIDA THROUGH THE CENTRAL BOARD OF INDIRECT TAXEX AND CUSTOMS THROUGH ITS CHAIRMAN AND OTHERS - 2024 (11) TMI 1332 - MADHYA PRADESH HIGH COURT.

The Hon'ble High Court has ruled that Section 16(4), which limits Input Tax Credit (‘ITC’) claims due to late return filing, is arbitrary. A taxpayer who has already paid both the cost of goods/services and the tax to the supplier should not lose their right to claim ITC because of a procedural delay in filing returns. The time limit imposed by Section 16(4) undermines this right and makes Section 16(2) ineffective. The legislative intent of Section 16(2) being a non-obstante clause should take precedence over Section 16(4).

Moreover, denying ITC for late filing, after paying fees and interest under Sections 47 and 50, punishes taxpayers twice for the same issue. Since the treasury is already compensated, the additional penalty under Section 16(4) in terms of denial of ITC is arbitrary and unfair.

Author’s take

The judgement presents an attractive argument against the restrictive nature of Section 16(4), particularly in the context of late filing of returns, it is crucial to recognize the broader legal framework within which non-obstante clauses operate. The Court highlighted that taxpayers who have already paid taxes to suppliers should not be deprived of ITC merely due to procedural delays, such as late filing of returns.

If this argument is accepted, it would make section 16(4) redundant. It is a cardinal rule of interpretation that no part of statute shall be construed as unnecessary or superfluous and no interpretation must be given that makes a provision redundant.

However, the interpretation of non-obstante clauses requires careful consideration of their legislative intent and scope. A non-obstante clause should not be seen as an unrestricted tool that can override any provision at will; rather, its scope is confined to the precise purpose for which it was included.

It may be argued that Section 16(4) is not in conflict with Section 16(2), rather it provides a condition in addition to the conditions imposed by Section 16(2). These are the early days of GST litigation and one has to watch this space carefully going forward.