2026-VIL-26-TEL
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SGST High Court Cases

GST – Time Limit for distribution of Input Tax Credit by Input Service Distributor - Challenge to validity of Rule 39(1)(a) of CGST Rules, 2017 insofar as it mandates distribution of Input Tax Credit within the same month – Petitioner case that Rule 39(1)(a) of CGST Rules is ultra vires Section 20 of the CGST Act, 2017 as it introduces a mandatory time limitation not contemplated by the CGST Act - During audit for FY 2017-18 and 2018-19, the authorities observed that the petitioner had accumulated ITC and distributed it in the last month instead of distributing it monthly as per Rule 39(1)(a) of the CGST Rules. The authorities issued a show-cause notice proposing a penalty for this alleged violation - Whether Rule 39(1)(a) of the CGST Rules, which mandates distribution of ITC within the same month, is ultra vires Section 20 of the CGST Act as it introduces a mandatory time limitation not contemplated by the Act – HELD - The Rule 39(1)(a) of the CGST Rules is ultra vires Section 20 of the CGST Act as it travels beyond the scope of the parent provision by introducing a mandatory time limit for distribution of ITC, which is not contemplated under Section 20 - While delegated legislation enjoys a presumption of validity, such presumption stands rebutted where the rule demonstrably travels beyond the limits of authority conferred by the parent statute. The Section 20 of the CGST Act merely provides that the credit 'shall be distributed in such manner as may be prescribed', without stipulating any time limit. In the absence of any express or implied statutory mandate authorising the prescription of a limitation period, the Rule-making authority cannot, under the guise of prescribing the "manner", introduce a substantive restriction which has the effect of extinguishing a vested statutory entitlement - The Act permits a recipient unit to avail ITC directly until the due date for filing of the return for the month of September or November of the subsequent financial year. The denial of an identical benefit solely on the ground that the credit is routed through an ISD results in hostile discrimination and is manifestly arbitrary and violation of Articles 14 and 300-A of the Constitution of India - The Section 20 of the CGST Act is intended to ensure seamless flow and equitable distribution of ITC. Any interpretation of the rule-making power that imposes rigid time constraints not envisaged by the statute would defeat this object and run contrary to the purpose of the provision - The Rule 39(1)(a) of the CGST Rules, to the extent it mandates distribution of ITC within the same month, as ultra vires Section 20 of the CGST Act and struck it down – The writ petition is allowed - Legislative intent of Section 20 - Where the legislature intends to authorise the prescription of a time limit through subordinate legislation, it has done so expressly. The absence of any such provision in Section 20 of the CGST Act, as it stood prior to 01.04.2025, is therefore to be treated as intentional and not accidental - It is trite law that when the parent statute does not provide for a limitation period, the rule-making authority cannot introduce a time restriction by invoking general rule-making powers, particularly where such restriction results in extinguishment of a statutory right, as this would amount to rewriting the statute and is impermissible in law - Violation of principles of natural justice - The petitioner had sought reasonable time to respond to the spot memos issued by the respondents, citing difficulties in collating voluminous data. However, the respondents declined the request and proceeded to conclude the audit in undue haste without affording the petitioner an opportunity to present its explanation or clarify its position - Whether the impugned Audit Proceedings and the show-cause notice are in violation of principles of natural justice - HELD - The audit objections were finalized and the matter was placed before the Monthly Monitoring Committee Meeting without prior notice to the petitioner and without affording it an opportunity to be heard. This action is held to be in clear derogation of the fundamental principles of natural justice. As per the CBIC GST Audit Manual, 2019, audit objections are required to be discussed with the taxpayer prior to finalization of the audit report, which was not done in the present case. The precipitate manner in which the audit proceedings were concluded, by denying the petitioner at least an opportunity to place its case on record, is held to vitiate the entire audit process - The Final Audit Report and the show-cause notice are quashed on the ground of violation of principles of natural justice - Issue of limitation - The proceedings pertain to FY 2017-18 and 2018-19, whereas the show-cause notice was issued on 30.01.2024, which is beyond the normal period of limitation prescribed under Section 73 of the CGST Act. The respondents sought to invoke the extended period of limitation under Section 74 on the allegation of 'suppression' - Whether the proceedings are barred by limitation - HELD - The invocation of the extended period of limitation under Section 74 on the ground of 'suppression' does not appear to be sustainable, as the record indicates that the particulars of distribution of ITC were duly disclosed by the petitioner in its periodical returns in Form GSTR-6 and were available to the department on the common GST portal. The suppression cannot be alleged when the facts are known to both the parties. The proceedings are barred by limitation and the Final Audit Report and the show-cause notice are quashed.
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