ARTICLE
19 September 2025

Divisional Bench Overrules The Singal Bench Order Of Refund Of Unutilized ITC In Cash On Account Of The Closure Of Business

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The Appellant, engaged in the business of manufacturing security inks and solutions, was registered under GST in Sikkim. The Respondent's operations were dependent upon supply orders from the Reserve Bank of India.
India Tax
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BRIEF FACTS OF THE CASE

  • The Appellant, engaged in the business of manufacturing security inks and solutions, was registered under GST in Sikkim. The Respondent's operations were dependent upon supply orders from the Reserve Bank of India. From January 2019 onwards SICPA discontinued its manufacturing activities in Sikkim. Subsequently, during the period April 2019 and March 2020, the Respondent sold its machinery and facilities, and at the time of sale, it claimed to have reversed the ITC as per the law. At the time of closure, an accumulated unutilized ITC balance of ₹4.37 crore remained in its electronic credit ledger.
  • The Respondent filed a refund application under Section 49(6) CGST Act, seeking refund of the unutilized ITC. It contended that Section 49(6) expressly provides that any balance remaining in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee, or any other amount payable may be refunded in accordance with the provisions of Section 54.
  • However, the said refund claim was rejected by the adjudicating and the appellate authorities on the ground that there are no provisions under the CGST Act to provide a refund of ITC on the closure of business.
  • Aggrieved by this, the Respondent filed a Writ Petition before the Sikkim High Court. The Single Judge allowed the writ petition, holding that there was no express prohibition in Sections 49(6) and 54(3) against the refund of ITC on the closure of business. The Court reasoned that while Section 54(3) deals with specific categories of refund, the law does not authorize retention of tax without authority, and therefore, the Respondent was entitled to a refund.
  • The Appellant filed an appeal before the Divisional bench of Sikkim High Court and the issue under consideration was whether a refund of accumulated/unutilized ITC lying in the electronic credit ledger can be claimed under Section 49(6) of the CGST Act upon closure of business, or whether a refund is permissible only in the limited circumstances expressly provided under Section 54(3) of the Act.

KEY OBSERVATIONS OF THE HON'BLE HIGH COURT

  • The Division Bench held that the refund of unutilized ITC on account of closure or discontinuance of business is not permissible under the CGST Act, 2017. Section 49(6) does not operate as an independent refund-granting provision but merely enables refund of balances in the electronic cash or credit ledger strictly "in accordance with Section 54." Section 54(3), by its plain language, limits refund of unutilized ITC to two narrowly defined situations—(i) zerorated supplies made without payment of tax, and (ii) accumulation of credit due to an inverted duty structure. The use of the negative phrase "no refund shall be allowed in cases other than" makes the provision exhaustive, leaving no scope for judicial expansion. Closure of business is not one of the recognized grounds; no refund can be claimed on that basis.
  • The Court further reiterated the principle laid down by the Supreme Court in Union of India v. VKC Footsteps (India) Pvt. Ltd. that refund under GST is a matter of statutory prescription and not a constitutional entitlement. The legislature is fully competent to prescribe the circumstances in which a refund may be granted, and courts cannot, on grounds of equity or hardship, enlarge the scope of refund beyond what is expressly provided. Any such attempt would amount to rewriting the taxing statute, which is impermissible in law.
  • Accordingly, the Division Bench concluded that Section 49(6), when read harmoniously with Section 54, cannot be interpreted as authorizing refund of ITC upon closure of business, and any claim made outside the two situations enumerated in Section 54(3) is legally untenable..
  • Consequently, the Division Bench allowed the appeal, set aside the Single Judge's judgment, and upheld the orders of the departmental authorities rejecting the refund application.

AURTUS COMMENTS

  • In the Emcure Pharmaceuticals vs. Commissioner of Central Excise [(2024) 25 Centax 252 (Bom.)] case, the Bombay High Court dismissed the appeal seeking a refund of unutilized CENVAT Credit upon the closure of one unit. The Court relied on the Full Bench decision in Gauri Plasticulture P. Ltd. vs. Commissioner of Central Excise [2018 (360) E.L.T. 967 (Bom.)] which had explicitly held that refund of unutilized credit on closure of manufacturing activities is not permissible under Section 11B of the Central Excise Act. The Court also clarified that earlier decisions such as Union of India vs Slovak India [2008 (10) S.T.R. 101 (Kar.)] and Lav Kush Textile vs Commissioner of Central Excise, Jaipur –II [2017 (353) E.L.T. 417 (Raj.)] were either overruled or not applicable in light of Gauri Plasticulture. The Supreme Court's admission of Emcure's SLP [SLP (C) No. 3752 of 2025] and its tagging with Bombay Dyeing v. CCE5 indicates that the issue may be revisited, but as of now, the legal position remains restrictive.
  • Both the Sikkim High Court and Bombay High Court judgments reflect a judicial reluctance to expand refund entitlements beyond what is expressly provided in the statute. They reinforce the principle that taxing statutes must be interpreted strictly, and courts cannot supply perceived legislative gaps through equitable reasoning. This approach ensures consistency and predictability in tax administration, but it also highlights a policy vacuum— namely, the absence of a statutory mechanism to deal with stranded ITC or CENVAT Credit in cases of business closure.
  • Current judicial stance is clear: refund of unutilized ITC or CENVAT Credit on account of closure of business is not permissible unless explicitly provided for in the statute. Any change in this position would require legislative intervention or a landmark ruling from the Supreme Court in the pending Emcure matter.

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