A Routine GST Dispute with Far-Reaching Consequences
Under the GST regime, the right to appeal is not entirely unconditional. A taxpayer who wishes to challenge an adverse order is required to deposit a prescribed percentage of the disputed tax as a statutory pre-deposit. This requirement serves two important purposes. First, it discourages frivolous appeals and ensures that only genuine disputes are carried forward. Second, it protects revenue by securing a portion of the disputed demand pending appellate proceedings. In this sense, the pre-deposit acts as a gateway to appellate remedies, balancing the interests of both taxpayers and the revenue authorities.
However, a practical difficulty arises after the taxpayer prevails on appeal. Once the appeal is allowed and the demand is set aside, the taxpayer becomes entitled to a refund of the statutory pre-deposit. But what happens if the taxpayer approaches the department for a refund after two years from the relevant date have passed? Can the department deny a refund merely on the ground that the application is time-barred under Section 54 of the CGST Act? More importantly, can the Government retain money that legally belongs to the taxpayer simply because of a procedural delay?
These questions assume significance because the GST law must operate within the framework of fairness and constitutional principles. While procedural timelines are undoubtedly important for administrative efficiency, they cannot be allowed to defeat substantive rights , particularly when the taxpayer has already succeeded in appeal, and the demand itself no longer survives.
This important issue came up for consideration before the Jharkhand High Court in BLA Infrastructure Pvt. Ltd. v. State of Jharkhand & Others- [2025-VIL-103-JHR decided on 30.0`1.2025]. The Court examined whether a refund of the statutory pre-deposit could be denied merely on limitation grounds under Section 54. Significantly, the High Court's decision has now been affirmed by the Supreme Court in State of Jharkhand vs. BLA Infrastructure [2026-VIL-04-SC decided on 09.01.2026], thereby giving the ruling greater authority and wider applicability.
The judgment assumes considerable importance because it not only clarifies the nature of limitation under Section 54 but also reiterates a fundamental constitutional principle that the State cannot retain money without authority of law. In doing so, the Court has drawn a clear distinction between procedural compliance and substantive justice, emphasising that procedural provisions must serve justice and not defeat it.
A Routine GST Dispute That Sparked an Important Legal Question
The taxpayer, engaged in the business of loading, unloading, and transporting coal, was issued a show cause notice under Section 74 of the GST Act, alleging a mismatch between the GSTR-1 and GSTR-3B returns for an earlier tax period. Thereafter, the department passed an ex parte order raising a demand comprising tax, interest, and penalty. Like many similar cases arising under GST, the dispute essentially originated from return mismatches and subsequent adjudication.
Aggrieved by the demand order, the taxpayer exercised the statutory right of appeal under Section 107 of the CGST Act. As required by law, the taxpayer deposited 10 per cent of the disputed tax amount as a statutory pre-deposit to maintain the appeal. This pre-deposit, as is well known, is mandatory and not a voluntary payment.
Upon examination of the facts and submissions, the appellate authority allowed the appeal in favour of the taxpayer. Once the appeal was allowed, the demand raised against the taxpayer stood set aside, and, consequently, the statutory pre-deposit became refundable to the taxpayer as a matter of course.
However, the matter did not end there. The taxpayer subsequently filed an application for a refund of the pre-deposit amount. The department, instead of processing the refund, issued a deficiency memo rejecting the application on the ground that it had been filed beyond the two-year period prescribed under Section 54 of the CGST Act. According to the department, the refund claim was time-barred and therefore not admissible.
Faced with this situation, the taxpayer approached the Jharkhand High Court, contending that once the appeal had been allowed, the statutory pre-deposit could not be retained by the department merely on the ground of limitation. The taxpayer argued that the refund of the pre-deposit is a consequential relief and cannot be denied on technical or procedural grounds.
Thus, what began as a routine dispute over a return mismatch ultimately gave rise to an important legal question — whether a procedural limitation under Section 54 can override the taxpayer's substantive right to a refund of the statutory pre-deposit
The Key Legal Puzzle: Is the Two-Year Limit Strict or Flexible?
At the heart of the case was a crucial legal question: Does the two-year time limit for refund applications under Section 54 act as a strict rule or a guideline that allows exceptions? This was important because if the time limit was mandatory, any refund application filed after two years would be automatically rejected, no matter how valid the claim.
The High Court looked closely at the wording of Section 54(1). The section states that a person “may” apply for a refund within 2 years. The word “may” be key, as it often indicates a choice or discretion rather than a strict requirement. The Court’s task was to interpret what the legislature really intended by using this word.
The Meaning of "May" - A Crucial Turning Point
The Court pointed out that the legislature deliberately used “may” rather than “shall.” In legal interpretation, the word “may” usually imply that there is some flexibility or discretion, whereas “shall” would indicate a strict requirement with no room for exceptions.
Refund of Pre-Deposit - A Taxpayer's Guaranteed Right
One of the most important points the High Court made was that once a taxpayer wins their appeal, the pre-deposit they paid no longer remains a disputed sum. At that point, the taxpayer has a legal right to have that money returned. In other words, the government has no authority to hold onto that amount any longer once the case is decided in favour of the taxpayer.
The Court stressed that getting the pre-deposit back isn’t a favour or a discretionary act by the tax department. It’s a statutory right—that is, a right provided by law—once the taxpayer succeeds in their appeal. Because of this, the tax department cannot refuse a refund simply because of technicalities, especially when there’s no question of the taxpayer gaining any unfair advantage.This reinforces the broader principle that procedural restrictions should not defeat fundamental rights.
Constitutional Safeguard - The Protection Under Article 265
The High Court turned to a fundamental principle laid out in the Constitution of India—Article 265. This constitutional article states that no tax can be imposed or collected unless it is backed by a valid law. The Court applied this principle to the case, noting that once the taxpayer’s appeal was successful, the original tax demand no longer had legal standing. In other words, once the appellate authority set aside the tax demand, the government no longer had any legal right to keep the taxpayer’s pre-deposit.
Because of this constitutional safeguard, the Court made it clear that the tax department cannot keep holding onto the taxpayer’s money. To do so, after the appeal is won, would violate the Constitution’s basic principle that no tax can be taken or kept without legal authority. Thus, the issue assumed a constitutional dimension.
No Unjust Enrichment - The Taxpayer's Own Money Should Return
A key factor the Court also looked at was the concept of unjust enrichment. Unjust enrichment happens when someone benefits at another’s expense without a valid reason. The Court observed that the pre-deposit in this case was paid directly by the taxpayer out of its own pocket. It wasn’t a tax amount that had been passed on to customers or collected from someone else. In other words, the taxpayer itself bore the cost.
Because the taxpayer had paid from its own funds, returning that money would not constitute an unfair gain. In fact, the Court recognised that the taxpayer was simply asking for its own money back. Since there was no risk of the taxpayer gaining an undue benefit, this further strengthened the taxpayer’s right to a refund. The Court made it clear that when a taxpayer’s own money is at stake, procedural hurdles should not block the return of what rightfully belongs to them.
Comparing with the Limitation Act - Why Strict Deadlines Don't Make Sense
The High Court also took a step back and considered how the GST timeline compares with general legal deadlines. They pointed out that under the Limitation Act—which sets standard time limits for various legal claims—most money-related claims can be filed within three years. Now, compare that to Section 54 of the GST Act, which sets a two-year limit. If Section 54 were applied rigidly, a taxpayer would lose the right to a refund after two years, even though other laws would allow them to make a claim for a longer period.
The Court found this difference troubling. If Section 54 were interpreted strictly, it would create an unreasonable situation. Taxpayers could be shut out of their refund rights sooner than expected, even when general legal principles allow more time. Because this would lead to inconsistent and unfair results, the Court concluded that Section 54’s time limit cannot be treated as absolute.
Judicial Support - How Other Courts Have Guided the Way
The High Court also drew support from the decision of the Madras High Court in Lenovo India Pvt. Ltd. v. Joint Commissioner of GST (2023-VIL-799-MAD dated 06.11.2023) , where refund timelines were interpreted pragmatically to avoid denial of legitimate claims on technical grounds.
The interpretation of the words "may" and "shall" has also been clarified by the Hon’ble Supreme Court in several decisions. In Muskan Enterprises & Anr. vs. State of Punjab & Anr. (2024 SCC Online SC 4107) , the Court held that the use of “may” or “shall” is not determinative, and the true legislative intent must be gathered from the context, purpose, and consequences of the provision. The Court emphasised that a provision appearing directory in form may, in substance, be mandatory depending upon the statutory scheme.
Similarly, in Rakesh Ranjan Shrivastava vs. State of Jharkhand & Anr. ((2024) 4 SCC 419) , the Supreme Court reiterated that although “may” ordinarily denotes discretion, it may be construed as mandatory depending upon legislative intent and the consequences of interpretation. The Court further held that where a mandatory interpretation leads to harsh or unjust consequences, the provision should be treated as directory.
These decisions support the principle that limitation provisions must be interpreted in a manner that advances fairness and prevents unjust outcomes.
Final Decision of the High Court - Emphasis on Substantive Justice Over Procedural Technicalities
After carefully examining the facts of the case, the statutory provisions, and the principles governing refund claims, the Hon’ble High Court concluded that the rejection of the refund application on the ground of limitation was not legally sustainable. The Court observed that the taxpayer had acted within the prescribed time and that the subsequent procedural objections raised through the deficiency memo could not defeat a legitimate refund claim.
Accordingly, the High Court set aside and quashed the deficiency memo issued by the department, holding that such rejection was based on an unduly technical and rigid interpretation of the law. The Court emphasised that procedural requirements are intended to facilitate justice, not to obstruct legitimate taxpayer claims.
Consequently, the Court directed the concerned authorities to process the refund application on merits and grant the eligible refund within 6 weeks from the date of the order. Further, recognising that the taxpayer had been deprived of the rightful amount for an extended period, the Court also directed that interest be paid in accordance with the statutory provisions, thereby ensuring complete and meaningful relief to the taxpayer. The decision reaffirms that substantive justice must prevail over procedural technicalities
Supreme Court Upholds the Ruling - Strengthening the Principle of Fair Refunds
The importance of the High Court’s decision was further strengthened when the Hon’ble Supreme Court upheld the ruling in State of Jharkhand vs. BLA Infrastructure (2026-VIL-04-SC dated 09.01.2026). By affirming the judgment, the Supreme Court endorsed the view that legitimate refund claims should not be denied merely on account of procedural or technical objections.
The Supreme Court’s affirmation reinforces the settled legal principle that procedural requirements are meant to facilitate the administration of law and not to defeat substantive rights. Where a taxpayer has otherwise complied with the law and is entitled to refund, such claims cannot be rejected on hyper-technical grounds such as procedural deficiencies or rigid interpretation of timelines.
With the Supreme Court upholding the High Court’s decision, the judgment now carries greater authoritative value and binding force. This ensures uniformity in tax administration and provides clarity that legitimate refund claims will be decided on merits rather than technicalities
Thus, the Supreme Court’s affirmation not only validates the reasoning of the High Court but also strengthens the broader principle of fairness, equity, and substantive justice in tax administration.
Conclusion - A Landmark Development in GST Refund Jurisprudence
The decision in BLA Infrastructure, now affirmed by the Hon’ble Supreme Court, represents a significant and welcome development in GST refund jurisprudence. The ruling brings much-needed clarity on an important issue by recognising that the refund of statutory pre-deposit is not a concession, but a vested right of the taxpayer, particularly when the appeal is decided in favour of the assessee.
The judgment also clarifies that the limitation prescribed under Section 54 of the CGST Act cannot always be applied in a rigid or mechanical manner, especially in cases involving the refund of statutory pre-deposit. The Court recognised that such refunds arise as a consequence of appellate proceedings and, therefore, procedural timelines should not be interpreted in a manner that defeats substantive rights.
By adopting this approach, the Court has reinforced a broader and more equitable principle — procedural provisions are meant to regulate the process, not to deny legitimate relief. The ruling thus strengthens taxpayer rights and promotes a fair, reasonable, and balanced tax administration.
Further, the decision reflects the judiciary's continuing emphasis on constitutional principles such as fairness, reasonableness, and the avoidance of arbitrary outcomes in tax matters. It sends a clear message that the objective of tax law is not merely revenue collection, but also ensuring justice and equity in implementation.
In an evolving GST framework, where refund-related disputes are increasingly common, this judgment stands as an important guiding precedent. It reminds both taxpayers and tax authorities that procedural requirements must facilitate justice and not frustrate legitimate claims. Accordingly, the ruling in BLA Infrastructure is likely to play an important role in shaping future GST refund jurisprudence and ensuring a more taxpayer-friendly and legally sound approach.
By CA Raj Jaggi & Adv Kirti Jaggi
CAclubindia
