Manual Filing of GST ITC-02 Valid Due to Portal Dysfunction, Denial Arbitrary: Bombay HC Quashes SCN under S.18(3) CGST Act & Rule 41 - 2024-10-11

Bombay High Court Quashes ₹18.30 Cr GST Demand Notice, Rules Manual ITC Form Filing Valid Amidst Portal Issues

Mumbai: The Bombay High Court, comprising Justices M.S. Sonak and Jitendra Jain , delivered a significant ruling, quashing a show cause notice (SCN) issued to Tikona Infinet Private Limited (" Tikona ") seeking to recover Input Tax Credit (ITC) amounting to ₹18,30,58,995. The court held that denying ITC solely because the requisite Form GST ITC-02 was filed manually, due to the non-functionality of the official GST portal for electronic filing during the relevant period, is arbitrary and unsustainable in law.

Case Background: Business Transfer and ITC Hurdles

Tikona Infinet acquired the business of Tikona Digital Networks (TDN) as a going concern through a Business Transfer Agreement (BTA) dated August 17, 2017. Following the transfer, TDN was entitled under Section 18(3) of the Central Goods and Services Tax (CGST) Act, 2017, to transfer its unutilised ITC to Tikona . Rule 41 of the CGST Rules mandates that this transfer should be detailed in Form GST ITC-02, filed electronically on the common portal.

However, between September and November 2017, the functionality to file Form GST ITC-02 electronically was unavailable on the GST portal. TDN informed the jurisdictional authorities about this issue via letter dated September 13, 2017 (filed September 22, 2017), seeking guidance and providing BTA details manually. Receiving no response, TDN and Tikona proceeded with manual submissions, including a Chartered Accountant's certificate confirming the transfer specifics, and Tikona eventually availed the ITC of ₹18.30 crore through its GSTR-3B returns.

Nearly six years later, on August 17, 2023, the Commissioner (CGST & Central Excise) issued an SCN to Tikona , alleging wrongful availment of the ITC solely on the ground that Form GST ITC-02 was not filed electronically as required by Rule 41.

Arguments Presented

Petitioner's Arguments ( Tikona Infinet ): * Mr. Prasad Paranjape , representing Tikona , argued that the SCN was without jurisdiction and arbitrary. * He stressed the admitted impossibility of filing Form ITC-02 electronically due to the portal's non-functionality, a situation beyond Tikona 's control. * Tikona had complied with the substance of the law by filing the form manually and informing the department. * Denying substantial ITC benefit for a procedural lapse caused by the department itself is unjust. * He cited similar favourable rulings obtained by Tikona from the Allahabad, Gujarat, and Delhi High Courts on identical facts.

Respondent's Arguments (Union of India/CGST Dept): * Mr. J B Mishra, for the Respondents, conceded the portal's non-functionality during the period but insisted on the strict mandate of Rule 41 requiring electronic filing. * He argued the SCN was intra vires (within powers) as the electronic filing condition was not met. * Tikona should raise its defences in response to the SCN rather than seeking its quashing via writ petition.

Court's Reasoning: Impossibility Excuses Strict Compliance

The High Court decisively sided with the petitioner, emphasizing the legal principle 'Lex non-cogit ad impossibilia' (the law does not compel the impossible). Key points from the judgment include:

Acknowledged Impossibility: The court noted the undisputed fact that the GST portal was incapable of accepting Form GST ITC-02 electronically at the time. "Thus, neither the Petitioner nor TDN could be faulted for not filing Form GST ITC-02 electronically..."

Arbitrariness: Issuing an SCN based on non-compliance with electronic filing, when such filing was impossible due to departmental portal issues, was deemed an "exercise in arbitrariness" and beyond the Respondent's jurisdiction.

Substantial Compliance: The court recognised that TDN and Tikona had filed the necessary information manually, including the CA certificate, fulfilling the substantive requirements. "...the only allegation is that the procedure of filing the prescribed form 'electronically' was not complied with. By invoking the principles in the above maxims... the respondents were bound to excuse the strict compliance with the procedural requirement..."

Precedents: The Bench took cognizance of the consistent stand taken by the Allahabad, Gujarat, and Delhi High Courts in Tikona 's own cases on the same issue, as well as a Rajasthan High Court decision (Pacific Industries Ltd.) and a coordinate Bombay HC bench decision (Savita Oil Technologies Ltd.) affirming that technical portal limitations cannot defeat substantive rights.

Final Decision and Directions

The Bombay High Court quashed and set aside the Show Cause Notice dated August 17, 2023.

The court directed the Respondents to: 1. Consider the manually filed forms submitted by TDN/ Tikona according to law. 2. Process the ITC claim based on its substantive merits. 3. Denial of ITC, if any, cannot be solely based on the non-electronic filing of Form GST ITC-02. 4. If, upon review, the ITC is found to be ineligible for other substantive reasons, the Respondents are free to take appropriate action following due process and principles of natural justice.

This judgment reinforces the principle that taxpayers cannot be penalized for procedural non-compliance when the failure is due to the limitations or malfunctioning of the government's own electronic systems, especially during the nascent stages of GST implementation.