Transitional Credit on Trial: Is Section 140(3)(iv) Constitutionally Sound?
I. Introduction
The enactment of the Goods and Services Tax (GST) in India on 1 July 2017 marked a transformational shift from multiple indirect tax levies to a unified tax regime. A critical aspect of this shift involved transitional provisions designed to protect and carry forward legitimate Input Tax Credit (ITC) accumulated under the pre-GST regime (including CENVAT) into the GST regime. Among these, Section 140 of the Central Goods and Services Tax Act, 2017 (CGST Act) sets out conditions and modalities for such transitional credit. Within this provision, Clause (iv) of sub-section (3) became a flashpoint of legal controversy due to its retrospective restriction on credit for certain classes of taxpayers, especially first stage dealers.
This article examines the constitutional validity of Section 140(3)(iv), judicial reasoning in key high court judgments, competing legal doctrines on vested rights vs. concessions, and the contemporary status of this constitutional challenge. The analysis places primary emphasis on the Gujarat High Court decision in Filco Trade Centre Pvt. Ltd. v. Union of India [2018(08)LCX0015] and the Bombay High Court ruling in JCB India Limited v. Union of India [2018(03)LCX0026], among other relevant jurisprudence.
II. Statutory Landscape: Section 140(3)(iv) and Transitional ITC
2.1 Transitional Provisions Under the CGST Act
The objective of Section 140 is to ensure seamless migration of tax credits earned under the erstwhile indirect tax laws into the GST framework, preventing double taxation and preserving taxpayer rights. Sub-section (3) specifically allows various categories of taxpayers, including unregistered persons, first stage dealers, second stage dealers, registered importers, etc., to claim credit on inputs held in stock, subject to conditions.
2.2 The Impugned Clause
Clause (iv) of Section 140(3) imposes a 12-month invoice age limit: the transitional credit is permissible only where the supporting invoices or documents were issued not earlier than twelve months immediately preceding the appointed day (i.e., 30 June 2016 to 1 July 2017).
This was absent under the pre-GST CENVAT regime for first stage dealers, who could pass on duty credit without such temporal limitations.
2.3 How the Clause Operates
Under Section 140(3)(iv), if a first stage dealer held goods in stock on the appointed day but the invoice was dated earlier than 12 months before that date, they could not carry forward the excise duty CENVAT credit into the GST regime-effectively resulting in a loss of credit and potential double taxation.
III. Constitutional Challenge and Competing Doctrines
3.1 Grounds of Challenge
Assessees challenged Section 140(3)(iv) on several constitutional pillars:
Arbitrariness and Violation of Article 14: The retrospective temporal restriction lacks rational nexus to GST objectives, discriminates between dealers and manufacturers, and imposes an unreasonable restriction on credit rights.
Property and Vested Rights (Article 300A): Transition of legitimately accumulated CENVAT credits represents an indefeasible right or proprietary interest; taking it away or limiting it retrospectively is impermissible without clear legislative mandate.
3.2 The Concession vs. Vested Right Debate
A core legal question was whether credit is:
(a) A concession granted by statute (which can be denied or conditioned), or
(b) A vested, indefeasible right (part of property) that cannot be retrospectively taken away without jeopardizing constitutional protections.
The Bombay High Court in JCB India emphasized the former view-that credit was a statutory concession subject to reasonable conditions, and thus limitations like the one-year rule were permissible.
In contrast, the Gujarat High Court in Filco held that where credit is already earned and vested prior to GST implementation, it is in the nature of an indefeasible right and cannot be cut down retrospectively in an arbitrary manner.
IV. The Gujarat High Court in Filco Trade Centre Pvt. Ltd.
4.1 Facts and Contentions
The petitioners (first stage dealers) contended that they were placed at a disadvantage compared to manufacturers and other registered persons, because their legitimately earned excise duty credit on stock held on 1 July 2017 was rendered ineligible if the tax invoices were older than 12 months. This, they argued, amounts to arbitrary discrimination and retrospective extinguishment of their credit rights.
4.2 High Court's Findings
The Gujarat High Court struck down Section 140(3)(iv) as unconstitutional to the extent it applied retrospectively to first stage dealers on the following grounds:
Absence of Rational Nexus: The 12-month restriction is not reasonably connected to objectives of transparency, anti-abuse, or administrative convenience. Dealers under the old regime could pass credit without any time limit; hence the restriction arbitrarily alters that legal position.
Retrospective Deprivation of Vested Rights: The historical rights of dealers under the pre-GST CENVAT framework were within their property interests; imposing an arbitrary temporal bar retrospectively curtailed that right and violated Article 14.
Inequality Among Classes: There was no principled distinction between dealers and manufacturers warranting harsher conditions for the former. Thus, differential treatment lacked intelligible differentia.
4.3 Orders and Interim Relief
The Gujarat High Court's order declared the impugned clause unconstitutional and struck it down as applied to first stage dealers. This order, however, was stayed by the Supreme Court upon appeal by the Revenue.
V. The Bombay High Court in JCB India Limited
5.1 Facts and Contentions
In a parallel set of writ petitions, the Bombay High Court dealt with similar constitutional challenges against Section 140(3)(iv). Petitioners argued that the cut-off date of 30 June 2016 arbitrarily denied credit on stock where invoices were older.
5.2 High Court's Reasoning
The Bombay High Court upheld the validity of Section 140(3)(iv) on key propositions:
CENVAT Credit Is a Concession: Following existing jurisprudence, the High Court held that CENVAT credit was merely a statutory concession within the tax regime. Accordingly, the Legislature could impose reasonable conditions and limitations, including temporal restrictions.
No Vested Right at Transition Point: Transitional credit, being contingent on compliance with conditions, could not be asserted as a vested right. Hence the imposition of the 12-month rule was within Parliament's legislative competence.
Rational Policy Considerations: The court accepted the Revenue's contention that requiring recent invoices served administrative purposes, helped prevent abuse, and aligned transitional provisions with similar temporal rules in the old CENVAT regime for manufacturers.
Thus, the Bombay High Court rejected the petitioner's challenge and upheld the constitutional validity of the impugned clause.
VI. Comparative Judicial Jurisprudence and Doctrinal Themes
The judicial landscape on Section 140(3)(iv) reveals conflicting views, not only between
Gujarat and Bombay High Courts but also among other High Courts on related issues (e.g., the Delhi High Court's decisions on vesting of credit under Article 300A, procedural limitations under Rule 117, etc.).
Key doctrinal tensions include:
Mandatory vs. Directory Nature of Credit Conditions: Courts have differed on whether conditions like time limits are directory (allowing some flexibility) or mandatory (strict bar).
Rule-making Power vs. Legislative Mandate: Whether the rule-making power under Section 164 can properly include time limits that effectively deny substantive rights has been debated.
Property Interest vs. Statutory Concession: Appellate case law under VAT and CENVAT has at times treated ITC as arising from statutory concessions rather than property, but GST transitional credit has been argued to have a different character because it preserves rights already accrued.
VII. Supreme Court Status and Practical Impact
The Supreme Court has entertained Special Leave Petitions against conflicting High Court judgments (e.g., Filco and JCB India), and has stayed the Gujarat High Court's striking down of Section 140(3)(iv). The Apex Court has also kept questions of law concerning Section 140 open while directing procedural relief (e.g., reopening the GST portal for TRAN-1/TRAN-2 in related transitional credit cases).
As of now:
The constitutional validity of Section 140(3)(iv) remains undecided by the Supreme Court.
Conflicting High Court views persist, contributing to uncertainty for first stage dealers and taxpayers relying on transitional credit.
VIII. Conclusion and Way Forward
The constitutional challenge to Section 140(3)(iv) raises fundamental questions about the nature of tax credit rights, the limits of legislative restrictions, and the interplay between retrospective provisions and constitutional safeguards.
Key Observations:
The Gujarat High Court adopted a rights-centric approach, characterizing transitional credit in certain contexts as a vested property right impermissible to curtail retrospectively without rational basis.
The Bombay High Court adopted a legislative discretion/policy perspective, treating credit as a concession and upholding the one-year limit as constitutionally permissible.
Supreme Court intervention has paused final resolution, but the issue remains deeply consequential for GST compliance and fairness.
Policy and Legal Implications:
A final Supreme Court ruling will likely address whether transitional ITC constitutes a vested right or a concession, and whether retrospective limitations can be imposed without infringing Articles 14 and 300A.
Clarification will bring certainty to GST transitional credit jurisprudence, particularly for first stage dealers, importers, and other affected classes.
In summary, while Section 140(3)(iv) embodies legitimate legislative attempts to curtail abuses and streamline transitional credit, its constitutional validity depends on nuanced balances between legislative intent, historical rights, and fundamental rights protections-a balance the Supreme Court will eventually have to adjudicate conclusively.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.