Steel Giant’s Desperate TRAN-1 Move Wins Refund, But Penalty Struck Down

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Case Name

Tvl. Rashtriya Ispat Nigam Limited Rep. by its Authorized Signatory v. The Deputy Commissioner (CT) III & The Assistant Commissioner of State Tax

Court Name: High Court of Judicature at Madras

Case Number: W.P. No. 22241 of 2019 & W.M.P. No. 21522 & 21524 of 2019

Date of Decision: 20th June 2022

Judge: Dr. Justice Anita Sumanth

Key Takeaways

1. Refund can’t be denied just because of internal technical issues — The tax department’s excuse of “technical problems” in processing refunds is not a valid reason to keep a taxpayer’s money. The court found this completely unacceptable.

2. A wrong TRAN-1 filing, done out of desperation (not fraud), doesn’t attract penalty under Section 74 — Section 74 of the TNGST Act requires proof of fraud, willful misstatement, or suppression to evade tax. If the taxpayer was transparent about their situation, penalty cannot be imposed.

3. Transparency saves the day — RINL had clearly stated in writing (as early as July 2017) that they knew they weren’t entitled to transition the credit and only wanted a refund. This honesty was a key factor in the court’s decision.

4. Section 42(5) of the TNVAT Act mandates refund within 90 days — If the refund is not processed within 90 days of the assessment order, the government is liable to pay interest at half percent per month on amounts of ₹100 or more.

5. The TRAN-1 filing was declared void — Since it was admittedly incorrect in law, the court held it carries no legal force and no credit can be availed from it.

6. Interest on refund was ordered only up to 27.12.2017 — The date when the TRAN-1 was filed was treated as the cut-off for interest calculation.

Issue

The central legal questions in this case were:

• Was RINL entitled to a cash refund of ₹11,94,312/- (excess tax paid under the CST Act) after the transition to GST?
• Can penalty and interest be imposed on RINL for filing an inadmissible TRAN-1 claim, when the filing was done only to protect its refund claim due to the department’s inaction?
• Does Section 74 of the TNGST Act apply when there is no fraud or intent to evade tax?

Facts

The Background:

RINL (a well-known public sector steel company) was registered as a dealer under the Tamil Nadu Value Added Tax Act, 2006 (TNVAT Act) and the Central Sales Tax Act, 1956 (CST Act). For the financial year 2015-16, they had claimed a concessional tax rate of 2% under Section 8(1) of the CST Act.

The Audit Problem:

In August 2016, the Enforcement Wing of the Commercial Taxes Department conducted an audit. During this audit, RINL couldn’t fully prove its concessional tax claim because it didn’t have all the required C-Forms (statutory declaration forms). So, to be safe, they deposited ₹40,00,000/- upfront.

The Assessment Order:

When the formal assessment order was passed on 30.12.2016, it turned out RINL had actually overpaid — the excess was determined at ₹38,91,410/- because they were able to produce the necessary C-Forms during assessment.

The Leftover Credit:

This excess amount was gradually adjusted against RINL’s tax dues from February 2017 to June 2017. After all adjustments, a balance of ₹11,94,312/- remained as a credit in RINL’s favour.

GST Comes In — And Creates a Problem:

On 1st July 2017, the new Tamil Nadu Goods and Services Tax Act, 2017 (TNGST Act) came into force. Under Section 140 of the TNGST Act, there’s a clear bar — you cannot transition credit that relates to a CST Act claim. The only option available was a cash refund under the old law.

RINL Asks for Refund:

RINL understood this correctly and on 19.07.2017, they wrote to the Deputy Commissioner requesting a cash refund of the ₹11,94,312/-. In their letter, they clearly stated they knew the amount couldn’t be transitioned to GST and only wanted a refund.

The Department Does Nothing:

The tax department simply sat on this request. Their excuse later? “Technical problems in giving VAT refunds online due to introduction of TNGST.”

RINL Panics and Files TRAN-1:

As time passed and the deadline for filing TRAN-1 (the GST transition form) approached — with an extended deadline of 27.12.2017 — RINL got worried they’d lose the money forever. So, they filed a TRAN-1 claiming the ₹11,94,312/- as transitional credit. They themselves knew this was legally wrong, but felt they had no choice.

The Show Cause Notice and Impugned Order:

The tax authorities issued a show cause notice proposing to reject the transition claim. They then passed an order:

• Rejecting the TRAN-1 claim ✓ (fair enough)
• Imposing penalty for wrongful transition ✗
• Levying interest from 27.12.2017 till the date of order ✗

RINL challenged this order before the Madras High Court.

Arguments

RINL’s Arguments (Petitioner):

1. "We were pushed into a corner" — RINL’s counsel, Mr. Poojesh J., argued that while the TRAN-1 filing was admittedly wrong, it was a desperate last resort because the refund request had been pending since 2017 with zero response from the department.

2. Legal entitlement to refund — He relied on Section 42(5) of the TNVAT Act read with Section 9(2) of the CST Act and Section 174 of the TNGST Act to argue that RINL was legally entitled to the refund.

3. No fraud, no penalty — The transition was done only to protect the refund claim, not to evade tax. Therefore, penalty and interest should not be imposed.

4. Case law support — He relied on:

• Magma Fincorp Ltd. vs. State of Telangana and Others [(2019) 3 ALD 695] — Telangana High Court
• DMR Constructions vs. The Assistant Commissioner, Commercial Tax Department [(2021) 91 GSTR 278] — Madras High Court
• Ganges International Private Ltd. vs. The Assistant Commissioner of GST & Central Excise [(2022) 1 Writ LR 431] — where the doctrine of necessity was invoked

Department’s Arguments (Respondents):

1. Section 142(8)(b) of TNGST Act bars credit — The Additional Government Pleader, Mr. Richardson Wilson, pointed to this provision which clearly states that any refund due under the old law must be paid in cash and cannot be claimed as input tax credit under GST.

2. Technical problems caused the delay — The department argued that the refund wasn’t processed because of technical issues with the online VAT refund system after GST was introduced. They said once the issues were resolved, all dealers were given legacy refunds, and RINL should have waited and then claimed the refund.

3. RINL’s writ petition deserves no consideration — The department essentially argued that since RINL wrongly filed the TRAN-1, the petition should be dismissed.

Key Legal Precedents & Provisions

Statutory Provisions:

Section 8(1) of the CST Act

Allows concessional 2% tax rate on inter-state sales with C-Forms

Section 9(2) of the CST Act

Deals with assessment and recovery under CST

Section 42(5) of the TNVAT Act

Mandates refund of excess tax within 90 days of assessment order; government pays 0.5% interest per month on delayed refunds

Section 140(1) of the TNGST Act

Bars transition of credit attributable to CST Act claims into GST; only cash refund is allowed

Section 142(8)(b) of the TNGST Act

Any refund due under old law must be paid in cash; rejected amounts cannot become ITC under GST

Section 174 of the TNGST Act

Savings clause — preserves rights and liabilities under old laws

Section 74 of the TNGST Act

Deals with tax demands in cases of fraud, willful misstatement, or suppression — requires these elements to be proven before penalty can be imposed

Article 226 of the Constitution of IndiaGives High Courts power to issue writs (like Certiorari) to quash illegal orders

Case Laws Cited:

1. Magma Fincorp Ltd. vs. State of Telangana and Others [(2019) 3 ALD 695]

• Court: Telangana High Court
• Relevance: Used to support the argument that a taxpayer who is denied a legitimate refund cannot be penalized for taking protective steps.

2. DMR Constructions vs. The Assistant Commissioner, Commercial Tax Department [(2021) 91 GSTR 278]

• Court: Madras High Court
• Relevance: The Madras HC had applied the Magma Fincorp decision and remanded the matter for fresh consideration — cited to show a similar approach should be taken here.

3. Ganges International Private Ltd. vs. The Assistant Commissioner of GST & Central Excise [(2022) 1 Writ LR 431]

• Court: Madras High Court (Single Judge)
• Relevance: The court had invoked the doctrine of necessity (though in distinguishable circumstances) — cited to support the argument that courts can step in when a taxpayer is left with no other option.

Judgment

RINL (the Petitioner) won! The writ petition was allowed.

The Court’s Reasoning:

The court, presided over by Dr. Justice Anita Sumanth, reasoned as follows:

1. RINL is entitled to the refund — no doubt about it:

The assessment order dated 30.12.2016 clearly determined ₹11,94,312/- as excess payment. There was no dispute about this. The refund request was made as early as 19.07.2017 and RINL’s letter showed they perfectly understood the law — they knew they couldn’t transition the amount and only wanted cash back.

2. The department’s excuse is unacceptable:

The court was quite blunt — it found it “curious” that the department expected RINL to wait until their internal technical problems were sorted out. The court said it couldn’t understand why the department’s technical difficulties should work to RINL’s detriment.

3. The TRAN-1 was a desperate, bonafide act — not fraud:

The court acknowledged that filing the TRAN-1 was legally wrong, but called it a “last ditch effort by a desperate assessee.” Since RINL had been transparent from day one (their July 2017 letter made their position crystal clear), there was no fraud, no suppression, and no intent to evade tax.

4. Section 74 cannot apply here:

For Section 74 of the TNGST Act to apply, the revenue must establish willful misstatement or suppression to evade tax. Since this was not a tax assessment but a determination of ITC correctness, and since RINL had no intent to evade tax, the ingredients of Section 74 were simply not satisfied. The penalty and interest order was therefore set aside.

5. The TRAN-1 is void:

Since the TRAN-1 was admittedly incorrect in law, the court declared it carries no legal force and no credit can be availed from it.

Orders Made by the Court:

Refund claim dated 19.07.2017 to be processed on merits by the State Taxes Officer (R1)

Refund to be paid with interest up to 27.12.2017 (the date TRAN-1 was filed)

Payment to be made within 4 weeks from receipt of the court order

Penalty and interest imposed under the impugned order — SET ASIDE

TRAN-1 declared void — no credit can be availed

No costs awarded to either party

FAQs

Q1: Why couldn’t RINL just transition the ₹11.94 lakh credit into GST?

Because Section 140(1) of the TNGST Act specifically bars the transition of credit that is attributable to a claim under the CST Act. The only remedy available was a cash refund under the old law.

Q2: If RINL knew the TRAN-1 was wrong, why did they file it?

They were in a panic! The department had been sitting on their refund request since July 2017 without any response. The deadline for TRAN-1 was approaching (27.12.2017), and they feared losing the money forever. It was a desperate protective measure, not a fraudulent one.

Q3: Why did the court set aside the penalty?

Because Section 74 of the TNGST Act — which was used to impose the penalty — requires proof of fraud, willful misstatement, or suppression to evade tax. RINL had been completely transparent about their situation from the beginning. There was no fraud, so Section 74 simply couldn’t apply.

Q4: What was the department’s excuse for not processing the refund?

They claimed there were technical problems with the online VAT refund system after GST was introduced. The court found this excuse completely unacceptable and said the taxpayer cannot be expected to suffer because of the department’s internal issues.

Q5: Does this mean RINL gets to keep the credit they claimed in TRAN-1?

Absolutely not! The court clearly declared the TRAN-1 as having no legal force. RINL gets a cash refund — not credit. The TRAN-1 is void.

Q6: What is the significance of Section 42(5) of the TNVAT Act in this case?This provision is very important — it mandates that the department must process refunds within 90 days of the assessment order. If they delay beyond 90 days, they must pay interest at 0.5% per month on the refund amount. This provision supported RINL’s right to receive the refund with interest.

Q7: What does this case mean for other taxpayers in similar situations?

This case sends a strong message: if a taxpayer is denied a legitimate refund due to departmental inaction, and takes a technically wrong step purely to protect their money (without any fraudulent intent), courts may protect them from penalty. Transparency and bonafide intent matter a lot!

Q8: Up to what date was interest on the refund ordered?

The court ordered interest only up to 27.12.2017 — the date when RINL filed the TRAN-1. After that date, since RINL had (wrongly) claimed the amount as credit in TRAN-1, interest was not extended beyond that point.

Heard Mr.Poojesh.J learned counsel for the petitioner and Mr. Richardson Wilson, learned Additional Government Pleader for the respondents.

2. The facts as relevant to decide this writ petition are as follows:

(i) The petitioner was registered as a dealer under the provisions of the

Tamil Nadu Value Added Tax Act, 2006 (in short 'TNVAT Act') and

Central Sales Tax Act, 1956 (in short 'CST Act').

(ii) The petitioner was being regularly assessed under both TNVAT

and CST Acts and for the period 2015-16 had claimed concessional rate of

tax at 2% under Section 8(1) of the CST Act.

(iii) An audit was conducted by the Enforcement Wing of the

Commercial Taxes Department in August 2016, when the petitioner had

been unable to substantiate its claim of concessional levy to the fullest

extent, as claimed by it.

(iv) It thus, deposited an amount of Rs.40,00,000/- towards non-

availability of a portion of the C-Forms as on the date of audit.

(v) When the order of assessment was passed on 30.12.2016, the

determination of tax revealed excess of Rs.38,91,410/- insofar as the

petitioner was in a position to provide the necessary statutory declaration

Forms during assessment.

(vi) The excess was adjusted for the period until 30.06.2017 leaving an

amount of Rs.11,94,312/- (in short ‘amount in question’) as credit balance.

(vii) With the inception of the Tamil Nadu Goods and Services Tax

Act, 2017 (in short 'TNGST Act') with effect from 01.07.2017, the

petitioner became entitled to the credit of the amount determined as excess,

being Rs.11,94,312/-.

(viii) Section 140 of the TNGST Act admittedly lays an embargo

against the availment of credit where such credit is attributable to a claim

under the CST Act, providing only for a refund of the amount.

(ix) The petitioner made a request before the 1st respondent/Deputy

Commissioner seeking refund of the amount in question.

(x) The refund claim was not acted upon, also admittedly.

(xi) The petitioner was well aware of the position that it could not

claim transition of the amount in question in light of the bar under Section

140(1). Thus and rightly, it did not, initially, seek transition in the TRAN-1 filed by it in the GST Portal.

(xii) However with the ticking of the clock, the petitioner grew

apprehensive that it would be denied the refund and would also miss the bus

as far as claiming of the credit was concerned.

(xiii) The extension of time granted for filing of TRAN-1 till

27.12.2017 came as a boon for the petitioner which filed a TRAN-1

claiming the refund as credit carried forward.

(xiv) The above admittedly, constitutes an inadmissible claim, and

there is no doubt either in the Court's mind nor in the mind of the petitioner, in this regard.

3. It is in the aforesaid circumstances that the impugned order has

come to be passed by the respondent who, vide a show cause notice, had

initially proposed to reject the transition of the ITC and confirmed the

proposal holding the petitioner liable to penalty for wrongful transition,

ineligible credit as well as interest from 27.12.2017 till date of order for

such ineligible claim. This order is challenged in this writ petition.

4. The submissions of Mr.Poojesh. J, learned counsel for the petitioner

are that the petitioner is well aware of the wrongful claim but has been

pushed to the corner since its claim for credit had admittedly been kept

pending from 2017 without favour of any response. He relies on a decision

of the Telangana High Court in the case of Magma Fincorp Ltd. Vs. State of

Telangana and Others, [(2019) 3 ALD 695].

5. He also relies on a decision of this Court in the case of DMR

Constructions Vs. The Assistant Commissioner, Commercial Tax

Department, [(2021) 91 GSTR 278] for the reason that the learned Judge in

that case, has applied the decision of the Telangana High Court in Magma

Fincorp Ltd. (supra) as well as Ganges International Private Ltd. Vs. The

Assistant Commissioner of GST & Central Excise, [(2022) 1 Writ LR 431]

wherein learned Single Judge has invoked the doctrine of necessity, though

in distinguishable circumstances. In fine, claims of the petitioner in that case were remanded to the assessing authority for de novo consideration.

6. He draws attention to the provisions of section 42(5) of the

TANVAT Act read with Section 9 (2) of the CST Act and Section 174 of

the TNGST Act in support of his submission that he is legally entitled to the claim of refund. He would reiterate the submission that the transition, while being admittedly incorrect, was only done to protect the interests of the petitioner and to save the amount in question from being lost forever.

7. Per contra, Mr.Richardson, learned Additional Government Pleader

for the respondents would draw my attention to Section 142(8)(b) of

TNGST Act, that reads thus:

142. Miscellaneous transitional provision.-8. a .

b. Where in pursuance of an assessment or adjudication

proceedings instituted, whether before, on or after the

appointed day under the existing law, any amount of tax,

interest, fine or penalty becomes refundable to the taxable

person, the same shall be refunded to him in cash under the

said law, and the amount rejected, if any, shall not be

admissible as input tax credit under this Act.

8. The above provision, clearly, places a restriction on the availment

of credit of any amount of refund to which the taxable person is entitled

under the erstwhile laws. He really need not labour on this position for the

reason that it is nobody’s case that the petitioner is at all entitled to

credit/transition. All the petitioner wants is a refund of the amount in

question. In addition, the petitioner would pray that the penalty and interest levied under the impugned order be set aside as the act of transition, though incorrect, was only to ensure the protection of its interest.

9. Having considered the detailed submissions of both learned counsel,

I am of the categoric view that the petitioner must succeed on the facts and

circumstance of the case.

10. The provisions of Section 42(5) of the TNVAT Act provide for the

payment and recovery of tax, penalty etc. and cast a mandate upon the

Commercial Taxes Department to refund any excess determined within a

period of 90 days from date of order of assessment/revision/appellate order.

Where the refund exceeds the stipulated time of 90 days, the Government is

liable to pay interest where the amount is not less than one hundred rupees,

a sum equal to a sum calculated at the rate of half percent or part thereof for such amount for each month or part thereof.

11. In the present case, the petitioners' request for refund has been

made as early as on 19.07.2017. The position of law has been understood by

the petitioner correctly as, in the request made for refund dated 19.07.2017, the petitioner states as follows:

With reference to the above, refund amount of

Rs.38,91,410/- was processed at your end against CST based

on the above given assessment order for the year 2015-16

during the month of Feb' 17 and the same is being adjusted

by us against CST payment from Feb' 17 till June' 17. An

amount of Rs.11,94,312/- is yet to be utilized against the

refunded amount.

Because of the transition from TNVAT to GST from 1st

July' 17, above given unutilized amount cannot be adjusted

against GST payment. Hence, we kindly request you to refund

the amount as early as possible.

12. The motives of the petitioner are found to be bondfide in law, since

it not only asks for a refund but also states that it is not entitled for

transition under GST laws.

13. Admittedly, the respondent has sat tight on the petitioners’ request

and in the counter filed, the reasons set out are as follows:

11. In respect of points raised in Sl.No.(a & b) in the

grounds of the affidavit, it is humbly submitted that the

petitioner has stated that since they have not received

response from the First respondent on their request to refund

the excess amount available at the end of the month of June

17 under the CST Act, they have carried the amount forward

into the Tran 1 in the fear of avoiding limitation which had

been imposed on the Tran 1 filing. The excess after

adjustment, was not refunded immediately as there existed

technical problems in giving VAT refunds through online, due

to introduction of TNGST. However, once, the online issue

was resolved, all dealer were given legacy refunds. However,

the dealer has taken 11,94,312 amount into TRAN 1 wrongly.

He must have claimed refund once the technical issue under

TNVAT Act was resolved. In view of the petitioners statement

this writ petition deserves no consideration and hence the

same may be dismissed.

14. It is indeed curious that the respondent should expect the

petitioner to wait till its house has been brought to order, that is, once

technical issues faced by it stand resolved and thereafter persist with the

request for refund. This Court is unable to appreciate how the petitioner is

expected to be aware of the technical difficulties faced by the officer or

indeed, why such delay should enure to its detriment.

15. The petitioner is entitled to the claim for refund, prima facie, as

evidenced by order dated 30.12.2016 of the first respondent wherein the

amount in question has been determined as excess payment and there is no

dispute raised in this regard.

16. Coming to the imposition of penalty and levy of interest under the

impugned order, I am of the view that sustaining the same would be hyper-

technical. No doubt, the petitioner has made an inadmissible claim of

transition. However, I have noticed earlier that it was a last ditch effort by a desperate assessee and I reiterate that view.

17. The counter of the respondent would support the delay for refund

citing technical problems. Such technical problems are still ongoing and

thus, the petitioner cannot be expected to wait indifferently for refund.

While this is the position on the other hand, the extension of time for filing of TRAN 1 also had a date of cut-off, being 27.12.2017.

18. Thus, while the filing of a TRAN 1 is clearly misconceived, the

petitioner is protected by the intention to protect its claim for refund in the face of the unjustified, and admitted delay on the part of the respondents.

That apart, the provisions of Section 74 would be applicable only in the case of wrongful availment/utilization of ITC by reason of fraud. The pre-

condition for invocation of Section 74 is that the revenue must establish

willful misstatement or suppression to evade tax.

19. In the present case, the question evasion of tax does not arise since

it is not an assessment but only determination of the correctness of

availment of ITC. In such a case, what would be relevant is to see whether

the availment of credit is with the intent of evading tax.

20. The petitioner has made a categoric statement of law in its

communication dated 19.07.2017, extracted in paragraph 11 supra making it

clear that it is aware of the position of law as regards the claim of refund.

The disclosure is clear and it appears unambiguous that the intentions of the petitioner are only to protect its interests.

21. That apart, the statement in counter in regard to the delay and the

fact that the effort of the petitioner has throughout been only to claim a

refund persuade me about the bonafides of its actions. As a consequence,

the ingredients of Section 74 do not stand satisfied in the present case. The impugned order to this extent, is set aside.

22. Let the refund claim dated 19.07.2017 be processed on merits by

the State Taxes Officer/R1, and paid over to the petitioner with interest till 27.12.2017, being the date when the TRAN 1 application was filed by the

petitioner, within a period of four weeks from date of receipt of copy of this order.

23. As the TRAN-1 filed by the petitioner, is admittedly incorrect in

law, it does not hold any force, and the question of availment of credit does not arise. This writ petition is allowed in the aforesaid terms. Connected miscellaneous petitions are closed. No costs.

DR.ANITA SUMANTH, J.