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In what could be seen as a big relief for businesses, the Delhi High Court on Tuesday ruled that time limit for transitional credit is only ‘directory’ and not ‘mandatory’. Experts say this is a landmark judgment as the ruling will not only benefit the petitioner but all the affected assessees who are not even party to the petition. This would mean all assessees can claim all pending transitional credit (technically known as input tax credit or ITC) till June 30.
Transitional credit refers to use of tax credit accumulated up to June 30, 2017, that is, last day of erstwhile central excise and service tax regime. Post-introduction of Goods & Services Tax (GST), special provision was made for credit accumulated under VAT, excise duty or service tax to be transited to GST. Barring registered dealers opting for composition scheme, all other assessees were given the opportunity to avail themselves of the transitional credit.
However, there were some conditions. The credit will be available only if returns for the last six months — from January 2017 to June 2017 — were filed in the previous regime ( VAT, excise and service tax returns had been filed). And Form TRAN I (to be filed by registered persons under GST, may be registered or unregistered under the old regime) has to be filed by December 27, 2017, to carry forward the input tax credit. Also, Form TRAN I can be rectified only once. The government permitted those registered persons who furnished evidence of attempt to load TRAN-I up to December 27, 2017, to file TRAN-I by March 31, 2019 .
Many unresolved issues
As many issues were unresolved, the matter reached the High Court. The petition prayed for quashing Rule 117 of CGST Rules 2017 as it seeks to impose a time limit to carry forward tax credit from the previous regime. It termed this particular rule as ‘arbitrary, unconstitutional and violative of Article 14 of the Constitution of India’. It was said that substantive benefit cannot be denied on procedural or technical grounds where the beneficiary has satisfied the substantive conditions for the benefit.
‘Directory, not mandatory’
After a virtual hearing on Tuesday, the Court held that the time limit prescribed under the said rule is ‘only directory and not mandatory.’ A ‘mandatory’ rule means it must be strictly complied with and non-observance of mandatory provisions involves the consequences of invalidation. However, when the rule is ‘directory’, it would be sufficient for it to be substantially complied with. But non-observance of directory provision does not entail the consequence of invalidating, whatever be the other consequences.
According to Abhishek A Rastogi, Partner at Khaitan & Co, who argued for the petitioner, the court in fact clearly mentioned that this benefit of transitional credit will be applicable for three years — that is, the period mentioned in the limitation act. “The court also ordered that extended time limit of three years should be applicable not only qua the petitioners but to all other petitioners who are facing the hardship of transitional credits,” he said. In other words, even others who were not party to this petition but affected can benefit from this order.
The court directed the Tax Department to allow all assessees to claim credit (accumulated during previous regime) by June 30, 2020.
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