The shift from the pre-GST indirect tax regime to the Goods and Services Tax system on 1 July 2017 required a mechanism to safeguard the input tax credit accumulated under the earlier tax laws. Businesses across the country had legitimately earned CENVAT credit under the service tax and central excise regimes. When GST replaced these taxes, the legislature recognised that such credit represented a valuable financial right of taxpayers. Accordingly, the CGST Act introduced provisions allowing taxpayers to carry forward and migrate their existing credit balances into the GST system, thereby ensuring continuity and fairness in the transition.This migration took place through the system of transitional input tax credit , primarily governed by Section 140 of the CGST Act, 2017 and Rule 117 of the CGST Rules, 2017. Taxpayers were required to declare their closing credit balances through Form GST TRAN-1, after which the eligible amount would be transferred to the electronic credit ledger under GST.
In the initial years of GST implementation, many taxpayers faced procedural and technical difficulties while filing TRAN-1. Over time, disputes also arose regarding the admissibility of transitional credit, particularly during departmental audits conducted several years after the transition. One recurring issue is whether State GST authorities can question transitional credit that has already been examined by Central GST authorities, especially when the credit originally arose under the service tax regime administered by the Central Government.
This article examines the relevant statutory provisions, limitation framework, and judicial guidance on this issue through a practical case study.
Case Study - Aayra Ltd.
Aayra Ltd., a company registered under GST in Haryana, provides Management Consultancy Services. It carried forward the transitional CENVAT credit of ₹25 lakh from the service tax regime into the GST system. This credit appeared as the closing balance on the ST-3 return for the period ending June 2017, the last return filed under the service tax law before the introduction of GST. In accordance with the transitional provisions of the CGST Act, the company declared this credit in Form GST TRAN-1 within the prescribed time limit, and the amount was subsequently reflected in its electronic credit ledger.
A few years later, the Central GST authorities conducted a departmental audit covering the relevant period, including the period immediately preceding the introduction of GST. During this audit, the officers examined the records relating to the transitional credit but did not raise any objection regarding the credit carried forward through TRAN-1.
Thereafter, the State GST authorities commenced a separate departmental audit in June 2025. During this audit, an objection was raised questioning the transitional credit claimed through TRAN-1. The State authorities indicated that the credit could not be accepted because the taxpayer had not produced any confirmation or verification certificate from the CGST authorities regarding the admissibility of the credit.
Notably, this audit was initiated several years after the transition to GST and long after the credit had been carried forward.
This situation raises important legal questions regarding the validity of such an audit objection and the statutory safeguards available to taxpayers.
Transitional Credit under Section 140 of the CGST Act
Section 140 of the CGST Act forms the foundation of the transitional credit framework under GST. The relevant part of Section 140(1) provides as follows:
“A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished by him under the existing law, within such time and in such manner as may be prescribed.”
This provision reflects the legislative intent to ensure a smooth transition of credit from the earlier tax regime to the GST regime. Businesses had accumulated CENVAT credit through legitimate transactions under earlier indirect tax laws, such as service tax and central excise. The legislature, therefore, recognised that such credit represented a legitimate financial entitlement of taxpayers.
If businesses were not allowed to carry forward this credit into GST, it would have disrupted business finances and could have resulted in double taxation. To avoid such hardship, the law permits a registered person to migrate the credit balance shown in the last return filed under the earlier tax regime into the GST system.
In practical terms, the credit appearing in the final service tax return (ST-3) or central excise return for the period ending 30 June 2017 could be transferred into the electronic credit ledger under GST , provided the declaration was made within the prescribed time and in the prescribed manner , namely through Form GST TRAN-1.
From the language of Section 140(1), a few key conditions become clear. The taxpayer must be registered under GST and must have filed the last return under the earlier tax regime showing the closing balance of CENVAT credit. The credit should also have been admissible under the earlier law, meaning that it must comply with the provisions of the CENVAT Credit Rules, 2004.
Once these conditions are satisfied and the declaration is filed within the prescribed time through TRAN-1 , the transitional credit becomes part of the taxpayer’s input tax credit under GST and can thereafter be utilised in accordance with the provisions of the CGST Act.
Rule 117 - Procedural Declaration of Transitional Credit, Not Departmental Certification
Rule 117 of the CGST Rules prescribes the procedure for claiming transitional credit under Section 140. In simple terms, it requires every registered person who wishes to carry forward credit from the earlier tax regime to file an electronic declaration in Form GST TRAN-1 on the GST portal. Originally, the rule required this declaration to be filed within 90 days from the appointed day (1 July 2017). However, the law also empowered the Commissioner to extend this period, and in practice, the Government issued several orders extending the deadline for filing TRAN-1, particularly in cases where taxpayers faced technical difficulties on the GST portal.
When filing TRAN-1, the taxpayer must specify the amount of eligible duties and taxes being carried forward under Section 140. In essence, the declaration enables the taxpayer to transfer the credit balance appearing in the last return filed under the earlier tax laws, such as the service tax or excise return, into the GST electronic credit ledger.The rule, therefore, serves a procedural and administrative purpose. It requires the taxpayer to disclose details of the credit being migrated into GST through an electronic declaration.
Importantly, the rule does not require the taxpayer to obtain any certificate or verification report from the tax authorities confirming the admissibility of the credit. The declaration in TRAN-1 is fundamentally based on the credit already recorded in the last return filed under the earlier law.Accordingly, if an audit authority insists that the taxpayer must produce a certificate from the CGST authorities confirming the admissibility of the credit, such a requirement does not find support in the statutory framework of either the CGST Act or the CGST Rules.
Legitimately Earned Input Tax Credit Cannot Be Denied Without Statutory Authority
The broader philosophy of input tax credit under GST is reflected in Section 16 of the CGST Act, which treats input tax credit as a central feature of the GST system. Section 16(2) lays down certain conditions for availing input tax credit. These include possession of a valid tax invoice, receipt of the goods or services, payment of tax by the supplier to the Government, and furnishing of the required return by the recipient.
Although Section 16 mainly deals with credit arising under the GST regime, the principle behind it is equally important. It reflects the idea that credit legitimately earned should not be denied without a proper legal basis. The concept of transitional credit follows the same principle, ensuring that credit accumulated under earlier tax laws is allowed to carry forward under GST.
Indian courts have also emphasised that input tax credit is not merely a concession granted by the Government but a valuable right available to the taxpayer. Once such credit has been validly earned and reflected in statutory returns, it cannot be denied unless the law clearly permits such denial.
Concurrent Jurisdiction under GST Does Not Permit Repeated Examination of the Same Issue
GST follows a dual administrative system in which both the Central and State tax authorities are responsible for tax administration. Section 6 of the CGST Act provides that officers appointed under the State GST law are also authorised to act as proper officers for the purposes of the CGST Act.
The purpose of this arrangement is to ensure efficient and coordinated tax administration without creating unnecessary duplication of proceedings. Although both authorities have concurrent jurisdiction, the law does not intend that the same issue should be repeatedly examined by different authorities without any new facts or material.
Therefore, if a particular issue has already been examined during an audit conducted by one authority, reopening the same matter by another authority without any statutory basis or fresh evidence may defeat the principle of coordinated administration on which the GST framework is built.
Statutory Limitation for Demand Proceedings under Sections 73 and 74
The CGST Act prescribes strict time limits for initiating demand proceedings where tax is alleged to have not been paid or has been short-paid.
Section 73 applies to cases where there is no allegation of fraud, wilful misstatement, or suppression of facts. Under this provision, the adjudication order must be issued within three years from the due date for filing the annual return for the relevant financial year.
For the financial year 2017–18, the extended due date for filing the annual return was 5 February 2020. Accordingly, the adjudication order under Section 73 had to be issued within three years from the extended due date for filing the annual return.
Section 74, on the other hand, applies where the case involves fraud, wilful misstatement, or suppression of facts. In such cases, the law provides a longer limitation period, and the adjudication order must be issued within five years from the due date for filing the annual return.
For FY 2017–18, the extended due date for filing the annual return was 5 February 2020. Accordingly, the adjudication order under Section 74 had to be issued within five years from the extended due date for filing the annual return.
In the present case, the audit initiated in June 2025 occurred after the statutory timelines had expired.Once these statutory timelines expire, the department loses the legal authority to initiate demand proceedings for that financial year, as the action becomes barred by limitation.
Judicial Recognition of Transitional Credit as a Substantive Taxpayer Right
Indian courts have consistently emphasised that transitional credit represents a substantive right of the taxpayer and should not be denied merely because of procedural or technical difficulties, particularly when the credit itself is otherwise legitimate.
One of the early decisions on the issue was Willowood Chemicals Pvt. Ltd. v. Union of India 2018 (19) G.S.T.L. 228 (Guj.), where the Gujarat High Court examined the validity of the time limit prescribed for filing TRAN-1 under Rule 117. While upholding the validity of the rule, the Court observed that the purpose of transitional credit provisions is to ensure a smooth migration of credit earned under the earlier tax regime into the GST framework, so that businesses are not deprived of the credit accumulated under the previous system.
A more taxpayer-friendly interpretation was adopted in Siddharth Enterprises v. Nodal Officer 2019 (29) G.S.T.L. 664 (Guj.) In this case, the Gujarat High Court held that CENVAT credit accumulated under the earlier indirect tax regime constitutes a vested right of the taxpayer. The Court observed that such credit cannot be denied merely because of procedural or technical difficulties in filing the TRAN-1 form. It further noted that denial of such credit may amount to depriving the taxpayer of property without authority of law, thereby attracting the protection of Article 300A of the Constitution of India.
The Delhi High Court adopted a similar approach in Brand Equity Treaties Ltd. v. Union of India 2020 (38) G.S.T.L. 10 (Del.). The Court held that transitional credit is a valuable property right of the taxpayer, and that procedural time limits should not defeat the substantive entitlement to credit that had been legitimately earned under the earlier tax regime.
This principle was reiterated in SKH Sheet Metals Components v. Union of India 2020 (33) G.S.T.L. 385 (Del.) , where the Delhi High Court allowed the taxpayer to revise the TRAN-1 declaration in order to claim legitimate transitional credit. The Court emphasised that GST is designed as a value-added tax system, and denial of legitimate credit would undermine the basic structure of the GST framework.
The Punjab and Haryana High Court also addressed this issue in Adfert Technologies Pvt. Ltd. v. Union of India 2020 (32) G.S.T.L. 726 (P & H). The Court directed the GST authorities to reopen the GST portal and allow the taxpayer to file TRAN-1, observing that procedural difficulties should not extinguish substantive rights.
The Madras High Court, in P.R. Mani Electronics v. Union of India 2020 (38) G.S.T.L. 161 (Mad.) , examined the interaction between the statutory provisions and procedural rules governing transitional credit. Although the Court upheld the validity of the time limits prescribed under Rule 117, it acknowledged that transitional credit forms an important part of the GST credit chain and must be interpreted in a manner consistent with the legislative objective of GST.
The broader nature of input tax credit was also discussed by the Supreme Court in Union of India v. VKC Footsteps India Pvt. Ltd. 2021 (52) G.S.T.L. 513 (S.C.). Although the case related to refund of unutilised input tax credit under Section 54, the Court reiterated that input tax credit is a statutory entitlement governed by the provisions of the GST law.
A significant development in the area of transitional credit was made by the Supreme Court in Union of India v. Filco Trade Centre Pvt. Ltd., 2022 (59) G.S.T.L. 513 (S.C.). Recognising the widespread technical difficulties faced by taxpayers during the initial implementation of GST, the Court directed the Government to reopen the TRAN-1 and TRAN-2 filing portal for all taxpayers for a specified period. The Court observed that many taxpayers had been unable to claim their legitimate transitional credit because of technical glitches on the GST portal, and the denial of such credit would cause serious injustice.
The decision in Filco Trade Centre reflects a practical judicial approach aimed at ensuring that procedural difficulties do not defeat substantive credit rights. By directing the reopening of the portal, the Supreme Court reinforced the principle that legitimate credit earned under the earlier tax regime should not be lost merely due to technical or administrative obstacles during the transition to GST.
Taken together, these judicial decisions establish a consistent legal principle : transitional credit validly earned under the earlier tax regime is a substantive statutory right and should not be denied on purely technical or procedural grounds when the taxpayer has otherwise complied with the law.
No Statutory Requirement for CGST Certification of Transitional Credit
When the statutory provisions and judicial principles discussed above are applied to Aayra Ltd. , the legal position becomes fairly clear.
The company carried forward transitional credit of ₹25 lakh, which was reflected in its ST-3 return under the service tax regime and was duly declared in Form GST TRAN-1 within the prescribed time. Therefore, the credit satisfies the requirements laid down in Section 140 of the CGST Act and Rule 117 of the CGST Rules.
The credit was also examined during the audit conducted by the CGST authorities, and no objection was raised regarding its admissibility at that stage. Since the credit originated under the service tax regime administered by the Central Government, the examination by the CGST authorities is highly relevant. The demand by the State GST authorities that the taxpayer produce a certificate from the CGST authorities confirming the admissibility of the credit has no basis in the CGST Act or the CGST Rules, as the transitional credit framework does not prescribe such a requirement.
Finality of Proceedings After Expiry of Limitation
An important principle of tax law is that once the statutory limitation period expires, tax proceedings attain finality. Limitation provisions in fiscal laws are not mere procedural rules; they are intended to balance the powers of the tax authorities with the need for certainty and stability in business affairs. When the law prescribes a time limit for initiating demand proceedings, the expiry of that period brings legal closure to the taxpayer’s position. After this point, the department cannot indirectly reopen the matter through audit objections, correspondence, or informal queries when the law itself no longer permits the issuance of a valid show cause notice.
The Supreme Court has repeatedly emphasised the importance of limitation in tax matters. In Collector of Central Excise v. M.M. Rubber Co. 1991 (55) E.L.T. 289 (S.C.), the Court observed that statutory time limits are meant to ensure finality and prevent taxpayers from being exposed to indefinite tax demands. Similarly, in State of Punjab v. Bhatinda District Co-operative Milk Producers Union Ltd. 2007 (11) SCC 363 , the Court held that when a statute prescribes a limitation period, authorities must act within that period and cannot reopen the matter after its expiry unless the law specifically allows it.
Applying this principle to GST, the limitation provisions contained in Sections 73 and 74 of the CGST Act ensure certainty in tax administration. Once the statutory time limits for issuing show-cause notices and passing adjudication orders have expired, the department effectively loses the authority to initiate demand proceedings for that period. In such a situation, raising audit objections or seeking further verification on the same issue would serve no legally sustainable purpose. The doctrine of finality, therefore, ensures that tax administration operates within statutory time limits and past transactions are not kept open to scrutiny indefinitely.
Fairness, Predictability, and Respect for Statutory Limits in GST Administration
The transitional credit provisions of the CGST Act were introduced to ensure a smooth and fair transition from the earlier indirect tax regime to GST. These provisions allowed businesses to carry forward the credit they had legitimately earned under the previous tax system.
Courts across the country have consistently recognised that input tax credit represents a valuable statutory right. At the same time, the limitation provisions contained in Sections 73 and 74 of the CGST Act play an equally important role by ensuring certainty and finality in tax administration.
The case of Aayra Ltd. illustrates how these principles operate in practice. In the present case, the transitional credit had been properly carried forward, examined during the CGST audit, and remained undisputed for several years. When the State GST authorities initiated a fresh audit in June 2025, the statutory limitation period for initiating demand proceedings for FY 2017-18 had already expired. In such circumstances, reopening the issue through audit objections may undermine the certainty that taxpayers require to conduct their business affairs.
Ultimately, the strength of the GST system lies not only in enforcement but also in fairness, predictability, and respect for statutory limits. When tax authorities operate within these boundaries, they strengthen both the credibility of the law and taxpayers' confidence, which is necessary for a stable and compliant tax system.
Key Takeaway
Dual or subsequent audits under GST cannot override the statutory limitation prescribed in Sections 73 and 74 of the CGST Act. Once the limitation period expires, transitional credit already declared and examined cannot be indirectly questioned through audit objections.
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