Retrospective insertion of section 16(5) overrides section 16(4)

Retrospective insertion of section 16(5) overrides section 16(4) time bars for financial year 2018-19.

Issue

Whether the revenue department can legally sustain an adjudication order disallowing Input Tax Credit (ITC) for the financial year 2018-19 under the time-bar provisions of Section 16(4), following the retrospective legislative insertion of Section 16(5).

Facts

The petitioner is a contractor executing Government works and is a registered taxpayer under the KGST and CGST Acts.
A departmental audit flagged an alleged short payment of tax and concluded that the petitioner’s claimed ITC was inoperable and time-barred under the restrictions of Section 16(4).
The tax department subsequently issued a Show Cause Notice (SCN) under Section 73 to recover the disputed amount.
The petitioner submitted a formal reply to the SCN, explicitly invoking the legal protections of the newly inserted Section 16(5), which was introduced to provide retrospective relief.
The Adjudicating Authority ignored the petitioner’s defense and passed a final order under Section 73(9) confirming the demand for tax, interest, and penalties.
The petitioner approached the High Court seeking to quash the demand order on the grounds that the authority failed to consider their reply or the statutory impact of Section 16(5).

Decision

Precedent Followed: The High Court relied on the established legal position settled in Manjunatha Exports v. Deputy Commissioner of Central Tax [2026].
Retrospective Dominance of Section 16(5): The Court noted that CBIC Circular No. 237/31/2024-GST and Notification No. 17/2024-CT explicitly implemented Section 16(5) with retrospective effect from July 1, 2017. This amendment completely overrides the rigid time limits of Section 16(4) for the financial years 2017-18 through 2020-21.
Extended Window Confirmed: Under this retrospective framework, any ITC availed through a Form GSTR-3B return filed up to November 30, 2021, is deemed valid and legally permissible.
Order Quashed and Remanded: Because the department’s denial of ITC rested entirely on the now-defunct Section 16(4) time bar, the final adjudication order was declared completely unsustainable and quashed. The matter was remitted back to the stage of the petitioner’s reply, with instructions for the department to verify factual eligibility without re-opening the settled issue of Section 16(5) permissibility.

Key Takeaways

Legislative Overrules Erase Past Defaults: The retrospective introduction of Section 16(5) effectively resets the compliance clock for early GST years, neutralizing previous tax demands that were based solely on missing the original deadlines of Section 16(4).
Mandate to Apply Current Law: Adjudicating authorities cannot ignore pending legislative amendments or binding CBIC clarifications during active proceedings. They must evaluate a taxpayer’s defense against the up-to-date statutory landscape.
Scope of Remand Verification: When a tax dispute is sent back to lower authorities due to a change in law, the investigation is strictly restricted to verifying physical invoices and factual calculations; the legal availability of the amendment itself cannot be questioned.

HIGH COURT OF KARNATAKA

Doulathray S. Marnoor

Deputy Commissioner of Commercial Taxes (Audit)-1^*

S. Vishwajith Shetty, J.

WRIT PETITION NO. 200771 OF 2026 (T-RES)

APRIL 16, 2026

Sandeep V. Patil, Adv. for the Petitioner. Mallikarjun Sahukar, Adv. for the Respondent.

ORDER

1. This writ petition under Article 226 of the Constitution of India is filed seeking for the following reliefs:

Issue a writ of certiorari or any other appropriate writ, order or direction quashing the adjudication order dated 22.04.2024 passed under Section 73(9) of the CGST/SGST Act by the respondent for the tax period April 2018 to March 19 produced as Annexure-D;

(b)

Direct the respondent in the events of remand to conduct de-novo adjudication strictly in accordance with law, after issuing a specific notice of personal hearing granting the petitioner reasonable opportunity to produce documents and make oral and written submission and by duly considering the applicable statutory provisions including Section 169(5) and the binding judicial precedents/orders of this Hon’ble Court and the Hon’ble Supreme Court;

(c)

Pass such other and further orders, including interim orders as this Hon’ble court may deems fit in the facts and circumstances of the case, in the interest of justice and equity.

2. Heard the learned counsel for the petitioner and learned Additional Government Advocate on behalf of the respondent.

3. The petitioner claims to be Contractor executing Government works and registered under the provisions of KGST and CGST Acts bearing GSTIN No.29AHSPM2041C1ZE. For the assessment year 2018-19, the petitioner filed his statutory returns. An audit was conducted by the respondent for the financial year 201819 and a audit report dated 28.04.2023 was submitted alleging short payment of tax and holding that petitioner is ineligible for Input Tax Credit (ITC) under Section 16(4) of the Central Goods and Services Tax Act, 2017 (for short, the ‘CGST Act, 2017’) interest liability and GST on royalty paid to the Government. It appears that based on the said report, the respondent has issued show cause notice on 04.12.2023 proposing determination of tax, interest and penalty under Section 73 of the KGST/CGST Acts, 2017 and the petitioner had filed a comprehensive reply for the show cause notice on 04.01.2024, explaining the factual and legal position and also bringing to the notice of the competent authority about insertion of Section 16(5) of the CGST Act, 2017 and accordingly had contended that denial of ITC was untenable. According to the petitioner, without appreciating the reply given to the show cause notice and without considering the insertion of Section 16(5) of the Act, 2017, the respondent has passed the impugned order dated 22.04.2024 under Section 73(9) of the CGST/KGST Acts, 2017 and has mechanically confirmed the proposed demand of tax, interest and penalty. It is under these circumstances, the petitioner is before this Court.

4. The question that arises for consideration in this writ petition has been considered by the Co-ordinate Bench of this Court in Manjunatha Exports v. Deputy Commissioner of Central Tax (Karnataka)/ W.P.No.6883/2026, disposed of on 11.03.2026. In paragraph Nos.5 and 6 of the said order, it is observed as follows:

“5. It is pertinent to note that the Central Board of Indirect Taxes and Customs vide Circular No.237/31/2024-GST dated 15.10.2024, issued to all Principal Chief Commissioners/Chief Commissioners/ principal Commissioners/ Commissioners of Central Tax (All) and Principal Director General/Directors General (All) has clarified the issues regarding implementation of provisions of sub-section (5) and sub-section (6) in section 16 of CGST Act, 2017. The Circular clarifies that sub-section (5) of Section 16 has been inserted retrospectively with effect from 01.07.2017 vide Finance (No.2) Act, 2024, thereby overriding the earlier time restriction prescribed under sub-section (4) of Section 16 in respect of the financial years 2017-18, 2018-19, 201920 and 2020-21. Subsection (5) to Section 16 was inserted by the Finance (No.2) Act, 2024, with retrospective effect from 01.017.2017. In pursuant thereof, the Ministry of Finance (Department of Revenue) Central Board of Indirect Taxes and Customs, issued Notification No.17/2024-Central Tax, dated 27.09.2024, followed by Circular No. 237/31/2024- GST dated 15.10.2024 providing clarification regarding the implementation of the said provision. The aforesaid legislative development by insertion of sub-section (5) to Section 16 through Finance (No.2) Act 2024, read with the clarification, affirms that claims of Input Tax Credit (ITC) availed through GSTR-3B returns filed up to 30th November 2021 shall be permissible. The relevant extract is reproduced hereunder:

“Reference is invited to sub-section (5) and sub-section (6) of section 16 of the Central Goods & Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) inserted in section 16 of the CGST Act, with effect from the 1st day of July, 2017, vide section 118 of the Finance (No. 2) Act, 2024, whereby the time limit to avail input tax credit under provisions of sub-section (4) of section 16 of CGST Act has been retrospectively extended in certain specified cases.”

6. It must be noticed that Section 16(5) was inserted by way of an amendment by Finance Act (No.2), 2024. The said clause is a non-obstante clause, as it states, “notwithstanding anything contained in subsection (4)”. If that were to be so, in light of the petitioner having claimed ITC with respect to the financial year 2018-19, by virtue of Section 16(5), petitioner’s entitlement would be extended till 30.11.2021, whereas the return of the petitioner was filed on 28.10.2019. The return filed is within the extended time prescribed under Section 16(5).”

5. In view of the aforesaid, the impugned adjudication order at Annexure-D dated 22.04.2024 passed by the respondent cannot be sustained. Accordingly, the following order:

(i)

Writ petition is partly allowed.

(ii)

The impugned adjudication order passed by the respondent at Annexure-D dated 22.04.2024 for the financial year 2018-19 is quashed and the matter is remitted to the respondent to the stage of reply to the show cause notice.

(iii)

The petitioner is directed to appear before the respondent on 29.04.2026.

(iv)

It is needless to state that the respondent authority shall look into the factual aspects of eligibility of claim of ITC, but not to revisit the permissibility of claiming ITC by virtue of extended time under Section 16(5) of CGST Act, 2017 in the light of the orders passed in Manjunatha Exports (supra).

(v)

All other contentions left open.