Division bench of Sikkim HC sets aside the order of single judge bench and holds refund of unutilized ITC is not available on closure of business

This Tax Alert summarizes the recent ruling of the division bench of Sikkim High Court (HC) ^[1]  regarding refund of unutilized input tax credit (ITC) on closure of business, under the Central Goods and Services Tax Act, 2017 (CGST Act).

Earlier, the single judge bench of the Sikkim HC ^[2]  had held that the assessee can claim refund of unutilized ITC on closure of business. Aggrieved, Revenue filed a writ appeal before the division bench of the Sikkim HC.

The key observations of the division bench of the HC are:

• The Supreme Court (SC) in case of VKC Footsteps ^[3] had held that Parliament is within its legislative authority to decide whether refund of ITC should be permitted or not. Section 49(6) contemplates refund of balances in the electronic cash or credit ledger only in the manner laid down under Section 54..
• The view that refund on closure of a unit is permissible due to the absence of an express prohibition in Section 49(6) is not correct. Section 54(3) itself limits refunds to two specific situations, and since closure of business does not fall within these, refunds on this ground are clearly excluded.
• Although Section 49(6) does not provide for refund of accumulated ITC upon discontinuation of business, assessee has admittedly sought refund under the said provision.
• Given the clear wording of Section 54(3), accepting the single judge’s view would amount to judicial re-writing, which is impermissible in law. It would, in effect, require adding a new clause to Section 54(3) to permit refund on closure of business, thereby creating an entitlement not envisaged by Parliament.

Accordingly, the division bench of the Sikkim HC set aside the order passed by the single judge, holding that there was an error apparent in law in the impugned judgment and held that refund of unutilized ITC is not available on closure of business. 

Comments:

• There have been divergent rulings on the issue of refund of credit upon business closure under the erstwhile regime. The matter is currently pending before the Supreme Court [SLP(C) No. 7390/2020].
• Even if SC allows refund of credit under the erstwhile regime, its applicability under GST may need evaluation since the CENVAT Credit Rules had no express prohibition on refund of unutilized ITC, unlike the proviso to Section 54(3) of the CGST Act.
• The industry may consider making representations to the Government for permitting refund of credit lying in the ledger upon business closure.
• Taxpayers who have already received refund basis the single judge order may need to evaluate requirement for repayment of such refund.

^[1] TS-772-HC(SIK)-2025-GST  
^[2] Refer EY Tax Alert- HC holds petitioner entitled to refund of unutilized ITC on closure of business dated 13 June 2025
^[3] (2022) 2 SCC 603