• Dated 17^th June, 2025

Sikkim High Court Allows Refund of Unutilized ITC on Closure of Business – Broad Interpretation of Section 49(6) of CGST Act

Brief Facts

SICPA India Pvt. Ltd., engaged in manufacturing security inks, had a registered GST presence in Sikkim. In January 2019, the company decided to permanently close its operations in the State. Between April 2019 and March 2020, all machinery and facilities were sold, and appropriate reversals of ITC were made on capital goods as per applicable provisions. Despite such reversals, an accumulated balance of unutilized Input Tax Credit (ITC) amounting to Rs. 4.37 crore remained in the Electronic Credit Ledger. The company applied for a refund of this amount under Section 49(6) read with Section 54 of the CGST Act. The Assistant Commissioner rejected the application on the ground that refund of unutilized ITC is not permissible in the case of business closure, as this is not an eligible category under Section 54(3). The first Appellate Authority upheld the aforesaid view. Aggrieved, the assessee approached the Sikkim High Court under Article 226 of the Constitution.

Assessee's Contention

The assessee argued that Section 49(6) of the CGST Act permits refund of any balance remaining in the Electronic Credit Ledger after payment of tax, fee, interest, or penalty, and this should not be restricted by the exceptions in Section 54(3). They contended that Section 54(3) provides for specific refund scenarios but should not be construed as exhaustive, especially in cases like business closure. The right to claim refund of genuine, accumulated ITC is a vested right and denial of the same would amount to unjust enrichment by the State. They further emphasized that Section 29(5) and 54(3) must be read harmoniously with Section 49(6). Relied upon case laws included Slovak India Trading Co. Pvt. Ltd., Shabnam Petrofils Pvt. Ltd., and Eicher Motors Ltd., to support their claim that refund is justified even if closure is not expressly mentioned in the statute. The Appellate Authority, they argued, failed to appreciate these positions and dismissed the claim without adequate reasoning.

Department's Contention

The Department contended that Section 54(3) allows refund of unutilized ITC to two situations- zero-rated supplies and inverted duty structure and closure of business is not among them. They maintained that Section 49(6) does not independently allow refund but is contingent upon the provisions of Section 54. Section 29(5) only allows for reversal of ITC on cancellation of registration, not its refund. Furthermore, they argued that the petitioner had an alternate remedy under Section 112 of the CGST Act and the writ petition was therefore not maintainable. They asserted that the rejection of the refund was proper, reasonable, and consistent with the legal framework.

Decision

The High Court first addressed the maintainability of the writ petition and held that writ jurisdiction under Article 226 can be invoked for questions of law, even if an alternate statutory remedy exists. Citing decisions like Godrej Sara Lee Ltd. and Indian Hume Pipe Co. Ltd., the Court held that alternative remedies do not bar the exercise of its jurisdiction. On the merits, the Court held that Section 49(6) allows for refund of balances in the Electronic Credit Ledger and while Section 54(3) specifies two situations, it does not explicitly prohibit refunds in other situations such as business closure. Referring to the Slovak India Trading Co. Pvt. Ltd. case, the Court observed that in the absence of express prohibition, denying refund would lead to unlawful retention of GST credit. Accordingly, it directed that the impugned order dated 22.03.2023 be set aside and refund of Rs. 4.37 crore be granted to the petitioner.

BTA's Comment

This judgment is a welcome interpretation in favour of taxpayers, emphasizing that closure of business should not lead to forfeiture of legitimate ITC entitlements. It reinforces that vested rights like ITC cannot be denied due to narrow interpretation of refund provisions. The decision recognizes the primacy of equity and the doctrine against unjust enrichment by the State. Businesses contemplating closure or restructuring may now have clearer ground to claim ITC refunds.

Author: Mohammed Rayyan

Edited by: Shaily Gupta