rule 86B restriction not applied where Income tax paid, Goods and Services Tax - GST

[SUSHIL BANSAL]

Friernds,

The rule 86B says that the said restriction shall not apply where –

(a) the said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under sub-section (1) of section 139 of the said Act has expired; or

My query is : tax paid of Rs. 1 lac is to be counted for tax paid in a Financial year or tax paid for a financial year. In our case for the FY 2018-19 tax paid was Rs. 85000 but in the f.y 2018-19 tax paid was more than Rs. 1 lac as self assessment tax of FY 17-18 was paid in the F.Y 2018-19 & if we count this self assessment tax then it crosses the limit of Rs. 1 lac.

experts plz guide

Posts / Replies

[Ganeshan Kalyani]

In my view, it would be "for the financial year".

[JAGDISH RAJ]

1. Applicability of Rule 86B:

• Rule 86B imposes a restriction on the use of the Input Tax Credit (ITC) available in the Electronic Credit Ledger when the aggregate value of taxable supplies (excluding exempt and zero-rated supplies) exceeds Rs. 50 lakhs in any given month. This restriction limits the ability to utilize the full ITC under such circumstances.

2. Legal Challenge to Rule 86B:

• Rule 86B is argued to be inconsistent with the fundamental provisions of the CGST Act, as it overrides Section 49 of the Act, thereby restricting the utilization of ITC in the Electronic Credit Ledger. Section 49(4) of the Act does not prescribe any specific limits or restrictions on the percentage of ITC that may be used for discharging tax liabilities.
• Section 49(4) of the CGST Act states: “The amount available in the Electronic Credit Ledger may be used for making any payment towards output tax under this Act or the Integrated Goods and Services Tax Act in such manner and subject to such conditions and restrictions as may be prescribed.” (Refer Rule 88A).
• Rule 88A, inserted by Notification No. 16/2019-CT dated 29th March 2019, governs the order of utilization of ITC but does not impose a restriction on the percentage of ITC that can be utilized for set-off.

3. Purpose of Rules and Violation of Legislative Intent:

• Rules under the CGST Act are intended to assist in the understanding and efficient implementation of the provisions of the Act, and must align with the statutory framework of the parent Act. Rule 86B is ultra vires (beyond the authority) of Sections 16(1) and 49(4) of the CGST Act.
• Rule 86B unlawfully restricts the utilization of legitimate ITC, which is not contemplated or permitted by the provisions of the Act itself.

4. Amendments to Section 49 and Legal Validity of Rule 86B:

• Prior to 1st October 2022, Rule 86B lacked the necessary statutory backing to restrict the legitimate utilization of ITC. In the absence of a corresponding amendment to Section 49 of the Act, Rule 86B could not have been lawfully applied to impose such restrictions.
• However, with the enactment of Sub-Section 12 to Section 49 by the Finance Act, 2022, and its enforcement from 1st October 2022 (as per Notification No. 18/2022-Central Tax dated 28th September 2022), the legal framework was amended to allow restrictions on ITC utilization, thereby giving statutory backing to Rule 86B.

5. Position After 1st October 2022:

• Prior to 1st October 2022, Rule 86B was ultra vires to the CGST Act as it lacked the requisite legislative foundation to impose restrictions on the utilization of ITC. With the introduction of the amendment to Section 49, effective from 1st October 2022, Rule 86B is now legally empowered to restrict ITC utilization in accordance with the prescribed conditions.
• A writ petition is pending before the Hon'ble Gujarat High Court in the case of AAP & Co. v. Union of India (R/Special Civil Application No. 917 of 2021), in which the constitutional validity of Rule 86B is under challenge. While the writ petition remains pending, the recent legislative amendments may affect the outcome of the case and resolve the issue in favor of the Government. Despite this, it is asserted that, in the absence of restrictions imposed by the amended law, the full ITC available in the Electronic Credit Ledger remains available for discharging output tax liability.

[KASTURI SETHI]

Sh.Sushil Bansal Ji,

Rule 86B talks of the term, 'in a financial year' and does not talk of 'for a financial year'. But it is implied that here the benefit of arrears of Income Tax, if paid in a financial year cannot be taken.

Rule 86B talks of the criteria of Income Tax 'paid in' each financial year for its non-applicability. It is pertinent to mention that Rule 86B was inserted w.e.f. 1.1.21. So in this situation, the last two financial years involved are 18-19 and 19-20. You will pay Income Tax in 18-19 (A.Y.) for the financial year 17-18 and in 19-20 (A.Y.) for financial year 18-19. The definitions of 'Financial Year' and 'Assessment Year' have to be taken care of.

Thus the reply to your query is in the negative.

[KASTURI SETHI]

In this scenario, it is pertinent to know the  legal dictionary meaning of phrases, 'in a year' and 'for a year'.

The phrase 'in a year' refers to a specific year and 'for a year'  means one year from then. Thus in this scenario, the phrase 'in a year' is in the fitness of things and  the phrase, 'for a year'  will not be in the  fitness of things.

[Amit Agrawal]

In the context of the Rule 86B, 'taxes paid' is with regards to self-assessed tax liability by the tax-payer for a financial year. And amount deposited as 'tax' as 'TDS' or 'Advance Tax' can be claimed as 'refund' while filing IT return under self-assessment.

In my view, 'In the financial year' - as used in rule 88B - is to be read as 'For a financial year' in the context of the query raised. 

This is more so when one reads entire clause (a): "........................... have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired'.

Otherwise, there was no need to add the words 'for which the time limit to file return of income under sub-section (1) of section 139 of the said Act has expired' in said clause (a).

Anyway, under Income Tax act, there is concept as 'assessment year' and 'previous year' and there is no concept as 'taxes paid in a financial year' unless & until it equate the same with 'taxes paid for a financial year. 

Looking at the entire history behind introduction of rule 88B (i.e. curb the menace of fake invoicing wherein a tax-paying paying more than 1 Lac in each of 2 fast FYs is prima-facie treated as 'genuine taxpayer'), 'taxes paid in a financial year' is nothing but 'taxes agreed as self-assessment & paid' while filing income tax return within its due date for a particular FY. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Surinder Singla]

Hello Friends

Now the Rule 86B of CGST Rules,2017 says that the said restriction shall not apply where -

• If the persons mentioned below have paid more than Rs.1 lakh as Income Tax under Income Tax Act, 1961 in each of the last two financial years for which the time limit to file the income tax return under Section 139(1) of the said Act has expired: or

Now my query is, if a person have paid income tax of Rs.1.50 lakh and subsequently have taken a refund of lets say 70k. Will that be considered.

As Rule 86B used the term *paid more than Rs.1 lakh as income tax*, but not used the term *but not subsequently refunded*

Please guide.

[KASTURI SETHI]

Not eligible. It is implied that you remain below Rs.One Lakh of Income Tax paid in one of  last two financial years. Thus you cannot avail such benefit.

[Shilpi Jain]

Additionally you should be glad to know that this rule is held ultra vires by the Himachal Pradesh HC in the case of AM Enterprises - 2024 (9) TMI 1485 - HIMACHAL PRADESH HIGH COURT

[KASTURI SETHI]

When any rule is held ultra vires by any High Court, the department continues issuing show cause notices on that issue until and unless the said rule is omitted. In such cases (as happened in the past), the department challenges such orders in Hon'ble Supreme Court. Hence the issuance of the SCNs continues till the final decision of the Supreme Court.

This aspect has to be taken care of by the tax payers.

[Surinder Singla]

I request the experts to examine my query in the light of Section 237 of the Income Tax Act,1961. Refund is admissible if the Income Tax Officer is satisfied. Refund is a consequence of law.

Old query is below given :-

Hello Friends

Now the Rule 86B of CGST Rules,2017 says that the said restriction shall not apply where -

• If the persons mentioned below have paid more than Rs.1 lakh as Income Tax under Income Tax Act, 1961 in each of the last two financial years for which the time limit to file the income tax return under Section 139(1) of the said Act has expired: or

Now my query is, if a person have paid income tax of Rs.1.50 lakh and subsequently have taken a refund of lets say 70k. Will that be considered.

As Rule 86B used the term *paid more than Rs.1 lakh as income tax*, but not used the term *but not subsequently refunded*

Please guide.

[KASTURI SETHI]

Sh.Singla Ji,

"As Rule 86B used the term *paid more than Rs.1 lakh as income tax*, but not used the term *but not subsequently refunded*."

     . The word "paid" implies actually paid.  No technical help is possible from the above highlighted words.

             These are my personal views.

[Yash Shah]

Tax paid of Rs. 1 lac is to be counted for tax paid in a financial period as we interpret the rule 86(b) stating that if the amount paid under income tax exceeds one lakh in each of the last two financial years where the time limit for filling income tax under sub-section 1 of section 139 has expired.

So here the time limit for filing income tax for F.Y. 2017-18 has expired and paying income tax for F.Y.2017-18 as self-assessment in F.Y. 2018-2019. Therefore the amount exceeds one lakh if we include self-assessment for F.Y. 2017-18 and rule 89(b), a registered person shall not use an electronic credit ledger for discharge of liability toward output tax in excess of ninety-nine per cent if the value of taxable supply other than exempt supply and zero-rated supply, in a month exceeds fifty lakh rupees shall not apply.

Section refers to the words as "in" so it should be read in that context and not otherwise. Giving meaning "for" would defeat the purpose.