Self-Contradictory Refund Direction for Closed Business: Amount to Be Paid Directly

Self-Contradictory Refund Direction for Closed Business: Amount to Be Paid Directly

Issue: Whether a tax authority can direct a GST refund to be credited to an assessee’s Electronic Credit Ledger when the assessee has already closed down its business and its GST registration has been cancelled, rendering the credit ledger unusable for the assessee.

Facts:

• A refund sanction order was passed in favor of the assessee.
• The basis for this sanction was that the assessee had closed down its business operations and its GST registration had already been cancelled.
• There was no tax due and payable by the assessee.
• The Proper Officer, in the initial refund sanction, had explicitly directed the amount to be paid to the bank account of the assessee as specified in the application.
• However, in the detailed refund sanction order, a contradictory provision was included, stating that the refund would be paid to the “registered taxpayer’s credit ledger.”
• The assessee was aggrieved by this latter part of the detailed order, as, with no active business and a cancelled registration, they would not be able to utilize any refund credited to their electronic credit ledger.

Decision: The court held that the direction in the detailed order was “self-contradictory.” Therefore, the Proper Officer was directed to reconsider the aforesaid direction. The decision was in favor of the assessee.

Key Takeaways:

• Logic of Refund for Closed Businesses: When a business has ceased operations and its registration is cancelled, any refund due to it is essentially a final settlement of its tax account. Crediting such a refund to an electronic credit ledger that cannot be utilized (because there’s no business to generate output tax liability against which the credit can be set off) defeats the purpose of the refund.
• Self-Contradiction in Order: The court identified the inherent contradiction in the department’s own order – first acknowledging business closure and cancelled registration, then directing credit to an unusable ledger. This highlights a lack of proper application of mind by the authority.
• Practical Implications for Assessee: For a closed business, a direct cash refund to the bank account is the only practical way to receive the benefit of the refund. Crediting it to an electronic ledger effectively makes the refund inaccessible.
• Direction to Reconsider: The court did not outright order a direct bank transfer but directed the Proper Officer to “reconsider” the direction. This implies that upon reconsideration, given the facts, the officer should logically conclude that a direct bank transfer is the appropriate mode of refund.
• Section 54 of CGST Act: This section deals with refunds. While it doesn’t explicitly state the mode of refund for cancelled registrations, the spirit of the law would be to ensure the refund actually benefits the taxpayer.
• Fairness and Equity: The ruling underscores the principle of fairness, ensuring that procedural aspects do not render a legitimate refund meaningless for the taxpayer.