Denial of ITC for Availment Under Wrong Head in ECL Set Aside; Electronic Credit Ledger is a Unified Pool of Funds

Issue:

Whether eligible Input Tax Credit (ITC) can be denied, and a demand for tax, interest, and penalty raised, merely because the assessee, during the GST transition period, inadvertently claimed the credit under a different head (e.g., IGST instead of CGST/SGST) in the Electronic Credit Ledger (ECL), and whether such a mistake warrants denial when the total ITC available is sufficient.

Facts:

For the assessment year 2017-18 (the year of transition from Value Added Tax to Goods and Services Tax), the petitioner received various interstate inward supplies of goods as well as intrastate inward supplies. Due to this transitional period, the eligible Input Tax Credit (ITC) was, by mistake, claimed under different heads in the Electronic Credit Ledger (ECL). Notices were subsequently issued demanding the Input Tax Credit wrongly claimed under the head of IGST, along with interest and penalty. The proceedings culminated in an order confirming the demand, on the basis that the petitioner had wrongly availed ineligible Input Tax Credit. On appeal, the Appellate Authority also declined relief. The assessee filed the instant writ petition.

Decision:

The court ruled in favor of the assessee. It heavily relied on the judgment in Rejimon Padickapparambil Alex v. Union of India [2024] (Ker.), which clarified the legal scenario relating to the utilization of Input Tax Credit under different compartments available in the Electronic Credit Ledger. The Rejimon Padickapparambil Alex case held that:

The electronic credit ledger is in the nature of a wallet with different compartments for Integrated Goods and Services Tax (IGST), Central Goods and Services Tax (CGST), and State Goods and Services Tax (SGST). There cannot be any “wrong availing” of Input Tax Credit merely because a taxpayer availed the benefit of credit available in one compartment under another.
Input Tax Credit available in the electronic credit ledger should be considered as a pool of funds designated for different types of taxes (CGST, IGST, SGST).
For utilizing any one liability, the eligibility of the fund for payment is based on the total balance in the entire wallet, not just the relevant compartment.
The GST system treats the electronic credit ledger as a unified resource, and interest is incurred only if collectively available funds fall below the amount of wrongly availed credit during a specified period.

Applying this proposition of law, the court found that both the Assessing Officer and the Appellate Authority had proceeded on the basis that such availment under any count was legally not justified. Therefore, the impugned orders were set aside, and a reconsideration was directed.

Key Takeaways:

Electronic Credit Ledger as a Unified Pool: This is the most crucial takeaway. The judgment unequivocally states that the ECL should be viewed as a single, unified “wallet” or “pool of funds” for ITC, even if it has different “compartments” for IGST, CGST, and SGST.
Interchangeability of ITC (Subject to Rules): The core principle implies that if an assessee has legitimate ITC, the fact that it was recorded or used under an incorrect head (e.g., IGST instead of CGST) does not, by itself, make it “ineligible” or “wrongly availed” as long as the total eligible credit in the pool is sufficient. The rules for utilization of credit (e.g., IGST first, then CGST/SGST) are distinct from the availment of eligible credit.
Focus on Eligibility, Not Mere Head Misclassification: The department should focus on whether the underlying ITC was genuinely eligible and properly available to the assessee, rather than penalizing for an inadvertent clerical error in claiming it under a different internal head within the ECL.
Interest only on Net Deficiency: Interest under GST is typically triggered if the overall available credit is insufficient to meet the tax liability, not merely because a specific compartment of the ECL shows a deficit if other compartments have surplus credit.
Reconsideration by Authorities: The remand directs the tax authorities to reconsider their orders in light of this clarified legal position, which is a significant relief for assessees who made such transitional errors.
Reliance on Judicial Precedent: The strong reliance on the Rejimon Padickapparambil Alex judgment highlights the development of jurisprudence clarifying practical aspects of the GST regime.
Circular No. 192/04/2023-GST: This circular also provides guidance on handling such mismatches and cross-utilization issues. The judgment aligns with the spirit of clarifying such practical challenges faced by taxpayers.

HIGH COURT OF KERALA

Manissery Jayachandran

Union of India

Bechu Kurian Thomas, J.

WP(C) NO. 2459 OF 2025

JANUARY 23, 2025

R. Jaikrishna, Narayani Harikrishnan, C.S.Arun Shankar, Anish P. , Akhil Shaji and Sajeesh A.P. , Advs. for the Petitioner. V. Girish Kumar, SC and Smt. Jasmin M.M. , GP for the Respondent.

JUDGMENT

1. Petitioner challenges Exhibit-P14 order of assessment issued by the fifth respondent, apart from Exhibit-P15 order in appeal and the consequential demand made as per Exhibit-P16.

2. For the assessment year 2017-18, petitioner claims to have received various interstate inward supplies of goods as well as intrastate inward supplies. The eligible Input Tax Credit was, by mistake, claimed under different heads since the transaction related to the year of transition from Value Added Tax to Goods and Services Tax. Subsequently, notices were issued under Section 73 of the Central Goods and Services Tax Act, 2017, demanding the Input Tax Credit wrongly claimed under the head of IGST, apart from interest and penalty. The proceeding resulted in Exhibit-P14 since petitioner had wrongly availed ineligible Input Tax Credit. The challenge against the said order before the Appellate Authority was also declined, against which the present writ petition has been filed.

3. I have heard Sri. R. Jaikrishna, the learned counsel for the petitioner, as well as Smt. Jasmin M. M., the learned Government Pleader and Sri. V. Gireeshkumar, the learned Standing Counsel.

4. In the decision in Rejimon Padickapparambil Alex v. Union of India GSTL 23 (Kerala)/2024 KHC Online 7215], a Division Bench of this Court had observed that the electronic credit ledger is in the nature of a wallet with different compartments of Integrated Goods and Services Tax, Central Goods and Services Tax and State Goods and Services Tax and there cannot be any wrong availing of Input Tax Credit merely because a taxpayer had availed the benefit of credit of input tax available in one compartment under the other. It has also been observed, after referring to Circular No. 192/04/2023-GST that, the Input Tax Credit available in the electronic credit ledger should be considered as a pool of funds designated for different types of taxes, such as CGST, IGST and SGST. Relying upon the circular, it is also observed that for utilizing the IGST liability, the eligibility of the fund for payment is based on the total balance in the entire wallet and not just the IGST compartment. It is thereafter held that the GST system treats the electronic credit ledger as a unified resource, and interest is incurred if collectively the available funds fall below the amount of wrongly availed credit during the specified period.

5. The aforesaid proposition of law clarifies the legal scenario relating to the utilisation of Input Tax Credit under the different compartments available in the electronic credit ledger. The said proposition has a bearing in the instant case. However, since the assessing officer as well as the Appellate Authority has proceeded on the basis that such availment under any count is legally not justified, I am of the view that, the impugned orders are liable to be set aside and a reconsideration be directed.

6. Accordingly, the assessment order and the appellate order produced as Exhibit-P14 and Exhibit-P15 are set aside and the fifth respondent is directed to reconsider the matter afresh, in a time-bound manner, at any rate, within a period of three months from the date of receipt of a copy of this judgment. In consequence of the above direction, Exhibit-P16 demand notice shall also stand quashed.

The writ petition is allowed as above.