Facts of the case:

In this case, the petitioner is a registered Input Service Distributor (ISD), for the F.Y. 2017–18 and 2018–19, the petitioner had availed eligible ITC on common input services and distributed such ITC to its recipient units. Instead of distributing the ITC month-wise, the petitioner accumulated the credit during the financial year and distributed the same in the last month of the respective year. During audit proceedings conducted by the DGAP, the respondent authorities took the view that such accumulation and year-end distribution violated Rule 39(1)(a) of the CGST Rules, 2017, which mandates that ITC “available for distribution in a month shall be distributed in the same month.” On this basis, spot memos were issued in December 2023, followed by a Final Audit Report dated 22.01.2024, concluding that the petitioner had contravened Section 171 of the CGST Act. Consequently, a show-cause notice was issued proposing imposition of a penalty under Section 122(1)(ix) of the CGST Act.

The petitioner approached the High Court challenging (i) the constitutional validity of Rule 39(1)(a) to the extent it mandates same-month distribution of ITC, (ii) the audit report, and (iii) the consequential show-cause notice. The petitioner contended that Section 20 of the CGST Act, as it stood prior to 01.04.2025, did not prescribe any time limit for distribution of ITC and that the rule-making authority had exceeded its delegated powers by introducing a substantive restriction through Rule 39(1)(a). It was further contended that the audit and show-cause notice were issued in violation of principles of natural justice and were barred by limitation.

Issue:

Whether Rule 39(1)(a) of the CGST Rules, 2017, insofar as it mandates distribution of ITC within the same month, is ultra vires Section 20 of the CGST Act as it stood prior to 01.04.2025?

Held that:

The Court held that Rule 39(1)(a) of the CGST Rules, 2017, to the extent it mandates that ITC available for distribution in a particular month must be distributed in that very month, is ultra vires Section 20 of the CGST Act as it stood prior to 01.04.2025. The Court observed that Section 20 merely authorises prescription of the manner of distribution of ITC by an ISD and does not contemplate or permit imposition of any time limit for such distribution. In the absence of express or implied statutory authority, the rule-making power under Section 164 could not be exercised to introduce a substantive restriction that has the effect of extinguishing or forfeiting a vested statutory right.

The Court emphasized that delegated legislation framed “for carrying out the purposes of the Act” cannot create substantive obligations, disabilities, or conditions not contemplated by the parent statute. By mandating same-month distribution, Rule 39(1)(a) imposed an inflexible time restriction which had the effect of denying legitimately accrued ITC and defeating the core objective of the GST regime, namely, avoidance of cascading of taxes. The subsequent amendment to Section 20 by the Finance Act, 2024, expressly empowering prescription of time limits with effect from 01.04.2025 was held to reinforce the conclusion that no such power existed earlier.

On the aspect of natural justice, the Court found that the audit proceedings were conducted in undue haste.  he audit objections were finalized without prior discussion with the petitioner, in clear breach of Para 5.13 of the CBIC GST Audit Manual, 2019, which mandates pre-finalization discussion of audit objections. Such denial of opportunity vitiated the entire audit process. With respect to limitation, the Court held that the show-cause notice issued on 30.01.2024 for FYs 2017–18 and 2018–19 was clearly beyond the normal period prescribed under Section 73. Invocation of the extended period under Section 74 on the ground of “suppression” was held to be unsustainable, since all relevant details of ITC distribution were duly disclosed in GSTR-6 returns and were available on the common GST portal.

Accordingly, the Court struck down Rule 39(1)(a) to the extent it mandates same-month distribution of ITC, and quashed the Final Audit Report dated 22.01.2024, the show-cause notice dated 30.01.2024, and all consequential proceedings.

Case Name: M/s. BirlaNu Ltd., Versus Union of India and 3 others. dated 30.12.2025

To read the complete judgement 2025 Taxo.online 3557