CA Inter Cost & Mgmt — Question Paper — November 2023

Under the Income Tax Act 1961, income is chargeable to income tax in India if it either arises in India (Section 9) or accrues to a resident of India (even if foreign-sourced). Income arises in India based on the location of the source, not where payment is made or received.

(1) YES — Hire charges for machinery in India, paid outside India. The machinery (source of income) is situated in India. Per Section 9(1)(i), income from property situated in India arises in India regardless of where payment is made. The situs of the asset, not the place of payment, determines the source.

(2) YES — Income of non-resident from film shooting in India. Services are rendered in India (source in India). Per Section 9(1)(iii), income from professional services and business activities conducted in India constitutes Indian source income. Non-residents are taxable on Indian source income, and this film shooting constitutes a business activity in India.

(3) YES — Capital gain on house property in India, registration and payment outside India. The immovable property is situated in India, which is the determining factor. Per Section 9(1)(vi), capital gains on transfer of immovable property situated in India arise in India regardless of where the transfer is registered or consideration paid. The location of the asset governs, not the place of transaction formalities.

(4) YES — Allowances to citizen for services rendered outside India, paid by Government. The source of income is the Government of India (the payer). Per Section 9(1)(ii), salaries and allowances paid by the Government of India are deemed to arise in India, even for services rendered outside India. The principle is that payments from Indian Government constitute Indian source income.

(5) NO — Past period foreign unearned income brought to India. Unearned income (such as gifts, inheritances, or similar) that arose outside India does not become chargeable merely by being brought to India. Per Section 9, income must arise in India to be treated as such. Additionally, per Section 10(6) and related provisions, gifts and inheritances are generally not taxable. The source (outside India) is not altered by subsequent remittance to India.

(6) NO — Gift received by non-resident at wedding in India. Gifts are generally not treated as "income" within the taxable meaning under Section 2(47). While Section 56(2) provides limited exceptions for gifts above specified thresholds from non-relatives (deemed income), gifts in general are excluded from the definition of income. A non-resident is taxed only on Indian source income; a gift (even if received physically in India) does not constitute income arising in India in the commercial sense.

Computation of Taxable Income of Mr. Sanjay for A.Y. 2023-24

For a Non-Resident (NR), only the following income is chargeable under Section 5(2) of the Income Tax Act, 1961:
- Income received or deemed to be received in India, and
- Income accruing or arising, or deemed to accrue or arise, in India (Section 9).

Analysis of Each Income:

(1) Interest on England Development Bonds — ₹60,000: This income accrues outside India (English Government bonds) and is presumed to be received outside India. It does not fall under any deeming provision of Section 9. Hence, NIL for a Non-Resident.

(2) Interest from Non-Resident — ₹5,000: Under Section 9(1)(v), interest paid by a non-resident is deemed to accrue in India if the money borrowed is used for the purposes of a business or profession carried on in India. Since the borrower (non-resident) used the loan to run a business in India, this interest is deemed to accrue in India. Taxable: ₹5,000.

(3) Royalty from Resident — ₹20,000: Under Section 9(1)(vi), royalty paid by a resident is normally deemed to accrue in India. However, an exception applies: it is NOT deemed to accrue in India if the royalty is payable in respect of any right, property, or information used for the purposes of a business or profession carried on outside India. Here, the technical services/royalty is for a business run outside India. Hence, NIL.

(4) Business Income from Sri Lanka — ₹25,000 (₹15,000 received in India): For a Non-Resident, income from a foreign business is taxable only to the extent it is received in India. Even though the business is controlled from India, this does not make the non-received portion taxable for an NR (unlike RNOR where Section 5(1) applies). Only ₹15,000 (received in India) is taxable.

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(i) Non-Resident — Total Taxable Income: ₹20,000

(ii) Non-Resident Individual Proprietor — Total Taxable Income: ₹20,000

The status of being an individual proprietor does not alter the territorial scope under Section 5(2) for a Non-Resident. The treatment of all four income heads remains identical. The taxable income is ₹20,000 in both cases.

Applicable Provisions and TDS Liability under Section 194Q of the Income Tax Act, 1961

Preliminary Check — Section 194O: Section 194O casts TDS obligation on e-commerce operators facilitating sale of goods/services through their digital platform. Since XYZ is directly purchasing fabric from ABC without any e-commerce intermediary, Section 194O has no application here.

Applicability of Section 194Q (TDS on Purchase of Goods): Section 194Q, effective from 1 July 2021, requires a buyer to deduct TDS @ 0.1% on purchase of goods from a resident seller if:
(a) the aggregate purchase value from that seller exceeds ₹50 lakh in the financial year, AND
(b) the buyer's gross turnover from business exceeds ₹10 crore in the immediately preceding financial year.

XYZ's position: Gross turnover of XYZ in FY 2021-22 = ₹12 crore > ₹10 crore → XYZ qualifies as a buyer liable to deduct TDS under Section 194Q for FY 2022-23.

ABC's position (check for Section 206C(1H) overlap): ABC's turnover in FY 2021-22 = ₹6 crore < ₹10 crore, so ABC is not liable to collect TCS under Section 206C(1H). Since Section 194Q specifically excludes transactions already subject to TDS/TCS under any other provision, and no other provision is triggered, Section 194Q fully governs.

Threshold and Deduction: Total payments to ABC during FY 2022-23 = ₹40,00,000 + ₹20,00,000 + ₹12,00,000 = ₹72,00,000 (₹72 lakh). This exceeds ₹50 lakh; TDS is deductible on the amount exceeding ₹50 lakh, i.e., on ₹22 lakh @ 0.1%.

Transaction-wise TDS deduction (at the time of payment or credit, whichever is earlier):
- 1.4.2022 — ₹40 lakh: Cumulative = ₹40 lakh. Threshold not crossed. No TDS.
- 2.7.2022 — ₹20 lakh: Cumulative = ₹60 lakh. Threshold crossed by ₹10 lakh. TDS on ₹10 lakh @ 0.1% = ₹1,000.
- 4.8.2022 — ₹12 lakh: Cumulative = ₹72 lakh. TDS on entire ₹12 lakh @ 0.1% = ₹1,200.

Total TDS to be deducted by XYZ = ₹2,200. Note: If ABC fails to furnish PAN, the rate escalates to 5% under Section 206AA of the Income Tax Act, 1961.

Computation of Taxable Leave Salary and Gratuity for Ms. Neelima for A.Y. 2023-24

Ms. Neelima is a non-government employee who retired from CD (P) Ltd. on December 31, 2022. The exemptions are governed by Section 10(10AA) of the Income Tax Act, 1961 (leave salary) and Section 10(10) (gratuity).

Note on Duration of Service: Working backward from the given data — Leave at credit = 45 days × years – 90 days availed = 540 days (18 months). This gives 45y = 630, so y = 14 completed years of service at CD (P) Ltd.

Average Salary (last 10 months): The last 10 months before December 31, 2022 are March 2022 to December 2022. Salary throughout = ₹22,600 p.m. Average monthly salary = ₹22,600.

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I. Taxable Leave Salary [Section 10(10AA)(ii)]

For a non-government employee, exemption is the least of:
- (a) Actual leave salary received = ₹4,14,000
- (b) 10 months' average salary = 10 × ₹22,600 = ₹2,26,000
- (c) Cash equivalent of leave at credit (restricted to 30 days per completed year): (₹22,600 ÷ 30) × (30 × 14) = ₹753.33 × 420 = ₹3,16,400
- (d) Statutory ceiling (₹3,00,000 for FY 2022-23) less exemption already claimed from LMN Ltd. (₹59,000) = ₹2,41,000

Least of (a), (b), (c), (d) = ₹2,26,000 ← Exemption

Taxable Leave Salary = ₹4,14,000 – ₹2,26,000 = ₹1,88,000

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II. Taxable Gratuity [Section 10(10)(iii)]

Ms. Neelima is not covered by the Payment of Gratuity Act, 1972. Exemption is the least of:
- (a) Actual gratuity received = ₹12,00,000
- (b) Half month's average salary × completed years = (₹22,600 ÷ 2) × 14 = ₹11,300 × 14 = ₹1,58,200
- (c) Statutory maximum = ₹20,00,000

Least of (a), (b), (c) = ₹1,58,200 ← Exemption

Taxable Gratuity = ₹12,00,000 – ₹1,58,200 = ₹10,41,800

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Summary:
- Taxable Leave Salary = ₹1,88,000
- Taxable Gratuity = ₹10,41,800

Head of Income: Income from Other Sources under Section 56(2)(i) of the Income Tax Act, 1961

Taxable Amount for FY 2022-23: NIL (₹0)

Reason and Analysis:

With effect from FY 2020-21, the Dividend Distribution Tax (DDT) regime was abolished by the Finance Act 2020. Accordingly, dividends received from domestic companies are no longer exempt under Section 10(34) and are now taxable in the hands of the shareholder under the head 'Income from Other Sources' as per Section 56(2)(i) of the Income Tax Act, 1961.

However, the critical issue here is the year of taxability of such dividend income.

Section 8 of the Income Tax Act, 1961 provides that for the purposes of inclusion in total income, any dividend declared, distributed, or paid by a company shall be deemed to be the income of the previous year in which it is so declared, distributed, or paid — whichever is earliest.

In the given case:
- Date of Declaration: The dividend was declared at the Annual General Meeting (AGM) of LSMN Limited held in October 2021, which falls in FY 2021-22.
- Date of Receipt: The dividend was actually received by Mr. L in April 2022, which falls in FY 2022-23.

Applying Section 8, since the dividend was declared in October 2021 (FY 2021-22), which is earlier than the date of receipt (April 2022, FY 2022-23), the dividend of ₹50,000 is deemed to be the income of FY 2021-22 (AY 2022-23) — NOT of FY 2022-23.

Conclusion: The taxable amount under 'Income from Other Sources' for Mr. L for FY 2022-23 is NIL. The dividend of ₹50,000 would have been assessable in FY 2021-22 (AY 2022-23).

Computation of Gross Total Income of Mr. Jai for Assessment Year 2023-24

Income from Salaries (Clubbed u/s 64(1)(ii) of the Income Tax Act, 1961):
Mrs. Jai's salary from PR Associates is clubbed in Mr. Jai's hands assuming Mr. Jai holds substantial interest (≥20% profits) in PR Associates. Salary: ₹1,20,000; Less: Standard deduction u/s 16(ia): ₹50,000. Net Salary: ₹70,000

Income from House Property: NIL. The brought forward loss of ₹1,00,000 from house property can only be set off against income from house property u/s 71B. Since there is no house property income this year, it is carried forward to subsequent years.

Profits and Gains of Business or Profession (PGBP):
Income from cycling business: ₹1,50,000. The loss from warehousing facility (₹1,00,000) is a regular business loss and is set off against cycling business income (intra-head, u/s 70). Net PGBP before depreciation: ₹50,000. Unabsorbed depreciation of ₹15,000 u/s 32(2) is then deducted. Net PGBP: ₹35,000

The share of loss from FP Associates (₹23,000) is not deductible — since a partner's share of profit from a firm is exempt u/s 10(2A), the corresponding share of loss cannot be set off (Section 67A principle).

The speculation loss of ₹20,000 can only be set off against speculation profits u/s 73. Since there is no speculation income, it is carried forward for up to 4 years.

Income from Other Sources:
Income from owning and maintaining race horses: ₹40,000; Loss from race horses: ₹37,000. Under Section 74A, loss from maintaining race horses can only be set off against income from the same activity. Net: ₹3,000.

Crossword puzzle income: ₹30,000 (fully taxable; no deduction allowed u/s 58(4); taxed at 30% flat u/s 115BB at tax computation stage).

Dividend income from domestic company: ₹12,000 (fully taxable in hands of shareholder post Finance Act 2020, u/s 56(2)(i)).

Total from Other Sources: ₹45,000

Items Excluded:
- Agricultural income from Haryana: ₹25,000 — Exempt u/s 10(1)
- Loss from gambling: ₹10,000 — Not deductible u/s 58(4); cannot be carried forward.

Gross Total Income = ₹70,000 + ₹35,000 + ₹45,000 = ₹1,50,000

Computation of Deduction under Section 80G of the Income Tax Act, 1961 for A.Y. 2023-24

Step 1: Computation of Gross Total Income (GTI)

Income from profession: ₹11,70,000; Winnings from lottery: ₹70,000. GTI = ₹12,40,000.

Step 2: Computation of Adjusted Gross Total Income (AGTI)

AGTI = GTI − Special rate incomes − Deductions under Chapter VI-A (other than Section 80G).

Lottery winnings are taxable at special rate u/s 115BB, hence excluded from AGTI. Contribution to ULIP for spouse qualifies as deduction u/s 80C: ₹70,000.

AGTI = ₹12,40,000 − ₹70,000 (lottery) − ₹70,000 (80C deduction) = ₹11,00,000.

The Qualifying Limit (10% of AGTI) = 10% × ₹11,00,000 = ₹1,10,000.

Step 3: Categorisation and Computation of 80G Deduction

All donations are by cheque, thus eligible. Section 80G provides deductions in four categories based on the rate and applicability of the qualifying ceiling.

(i) Cheque donation to National Defence Fund: ₹60,000 — Covered under Section 80G(2)(a)(i). Rate: 100% without qualifying limit. Deduction = ₹60,000.

(ii) Cheque donation to Government for promoting family planning: ₹35,000 — Covered under Section 80G. Rate: 100% subject to qualifying limit. Qualifying amount = Min(₹35,000, ₹1,10,000) = ₹35,000. Deduction = 100% × ₹35,000 = ₹35,000.

(iii) Cheque donation to approved public charitable institution: ₹1,20,000 — Covered under Section 80G(5). Rate: 50% subject to qualifying limit. Qualifying amount = Min(₹1,20,000, ₹1,10,000) = ₹1,10,000. Deduction = 50% × ₹1,10,000 = ₹55,000.

Total Deduction under Section 80G = ₹60,000 + ₹35,000 + ₹55,000 = ₹1,50,000.

Tax Collection at Source on Overseas Remittance by Authorized Dealer

Provisions under Section 194O:

Section 194O of the Income Tax Act, 1961 (introduced by Finance Act, 2020) provides for Tax Collection at Source (TCS) on remittance of money outside India by an authorized dealer in foreign exchange. An authorized dealer means a person authorized by the Reserve Bank of India to deal in or with foreign exchange. TCS applies when an authorized dealer remits money on behalf of any person to a resident outside India.

Rate of Tax Collection:

The standard rate of TCS is 0.5% of the amount remitted. However, the rate is 5% for remittance by way of purchase of foreign currency in cash for travel to such countries or territories as notified by the Central Government as high-risk jurisdictions.

Amounts and Transactions where No Tax is Collected:

1. Export Remittances: TCS is not collected on remittances on account of export of goods or services from India.

2. Authorized Person Remittances: No TCS is levied when the authorized dealer remits in its own name or on behalf of any other authorized person recognized by RBI.

3. Notified Exemptions: Remittances to countries, territories, or for purposes notified by the Central Government are exempt from TCS collection.

4. Monetary Thresholds: Remittances below monetary limits notified by the Central Government are exempt. For instance, cash remittance for travel purposes up to ₹7 lakh per financial year is currently exempt from TCS.

5. Tax Already Paid: If the remitter satisfies the authorized dealer that equivalent tax has been paid or will be paid as income tax liability, TCS collection may be waived or reduced.

6. Board Specifications: Any other exemption or special provision notified by the Central Board of Direct Taxes or Central Government.

Collection Mechanism:

The authorized dealer must collect TCS at the point of remittance based on information provided by the remitter. The collected tax is credited to the Central Government's account. The remitter receives credit for TCS paid against their tax liability and obtains a certificate of TCS payment for compliance purposes.

Computation of Net Minimum GST Payable in Cash by M/s. Honest Enterprise for December 2022

Treatment of Outward Supplies:

I. Intra-state supply of goods — ₹7,00,000: Taxable under forward charge. CGST @ 2.5% = ₹17,500; SGST @ 2.5% = ₹17,500.

II. Inter-state transfer to branch (same GSTIN) — ₹1,00,000: As per Schedule I of the CGST Act, 2017, supply between distinct persons (different GSTINs) is taxable even without consideration. However, since both places are registered under the same GSTIN, they are NOT distinct persons and this transfer is NOT a supply — no GST liability.

III. Sponsorship services to NGC List, Chennai — ₹80,000: Under Notification No. 13/2017-CT(Rate) (Reverse Charge Mechanism), services by way of sponsorship supplied by any person to a body corporate or partnership firm attract RCM. The recipient (NGC List) is liable to pay GST. Miss Nitya has no output tax liability on this transaction.

IV. Advance received for management consultancy — ₹40,000: This is an advance received for future supply of services (intra-state). Under Section 13(2) of the CGST Act, 2017, time of supply is the earlier of date of payment or date of invoice — hence taxable in December 2022. CGST @ 9% = ₹3,600; SGST @ 9% = ₹3,600.

Treatment of Inward Supplies:

I. Purchase of taxable goods — ₹8,00,000: ITC available as per Section 16 of the CGST Act, 2017. CGST ITC = ₹20,000; SGST ITC = ₹20,000.

II. Works contract for repair of office building — ₹30,000: Section 17(5)(c) of the CGST Act, 2017 blocks ITC on works contract services for construction of immovable property. As per the Explanation to Section 17(5), 'construction' includes repairs only to the extent of capitalisation. Since the repair cost is debited to Profit & Loss account (i.e., not capitalised), ITC is available. CGST ITC = ₹2,700; SGST ITC = ₹2,700.

III. Legal services from advocate — ₹50,000: Under Notification No. 13/2017-CT(Rate), legal services by an advocate to a business entity attract RCM. Miss Nitya (recipient) must pay GST in cash — ITC cannot be used to discharge RCM liability as per Section 49(4) of the CGST Act, 2017, which restricts ITC utilisation to forward charge output tax only. After cash payment, ITC becomes eligible under Section 16. CGST @ 9% = ₹4,500; SGST @ 9% = ₹4,500.

Net Minimum GST Payable in Cash:

Forward charge output CGST (₹21,100) is fully offset by ITC of ₹27,200 — no cash needed for forward charge. RCM liability of ₹9,000 (CGST ₹4,500 + SGST ₹4,500) must be paid in cash compulsorily.

Net minimum GST payable in cash = ₹9,000 (CGST ₹4,500 + SGST ₹4,500)

Excess ITC of CGST ₹6,100 and SGST ₹6,100 (total ₹12,200) is carried forward to the next period.

Computation of Value of Supply on which GST is to be paid by Mr. Dhanwan for January 2021

| Sr. | Particulars | Amount (₹) | Taxable Value (₹) |
|-----|-------------|-------------|-------------------|
| I | Security & housekeeping services to Rishi Foundation (outside premises) | 60,000 | 60,000 |
| II | Honorarium for guest anchor on Arpan TV | 2,25,000 | 2,25,000 |
| III | Hiring charges for non-AC contract carriage to M/s. Shisely Pvt. Ltd. | 1,50,000 | Nil |
| IV | Training in recreation activities of music | 90,000 | 90,000 |
| V | Renting of residential flat for personal residence | 30,000 | Nil |
| | Total Value of Taxable Supply (GST payable by Mr. Dhanwan) | 5,55,000 | 3,75,000 |

The value of supply on which GST is to be paid by Mr. Dhanwan is ₹3,75,000.

Notes:

Item I — ₹60,000 (TAXABLE): Under Entry 66 of Notification No. 12/2017-Central Tax (Rate), security or housekeeping services provided TO an educational institution are exempt only when such services are performed in such educational institution. Here, the annual day function is held outside the school premises, so the condition of being performed 'in' the institution is not satisfied. The exemption does not apply and ₹60,000 is fully taxable.

Item II — ₹2,25,000 (TAXABLE): Receipt of honorarium by Mr. Dhanwan for appearing as a guest anchor on Arpan TV constitutes a taxable supply of service. No specific exemption is available under Notification No. 12/2017-CT(Rate) for such services. The service is not in the nature of an employer-employee relationship. Hence, fully taxable.

Item III — ₹1,50,000 (NIL — RCM): The service of renting of a motor vehicle (non-AC contract carriage) where the vehicle is placed at the disposal of the recipient is treated as renting of motor vehicle (not mere transportation of passengers). Under Entry 15 of Notification No. 13/2017-Central Tax (Rate) read with Section 9(3) of the CGST Act, 2017, when such service is provided by any person other than a body corporate (Mr. Dhanwan — an individual) to a body corporate (M/s. Shisely Pvt. Ltd.), GST is payable under Reverse Charge Mechanism (RCM) by the recipient. Accordingly, Mr. Dhanwan is not liable to pay GST on this supply; the liability rests with M/s. Shisely Pvt. Ltd.

Item IV — ₹90,000 (TAXABLE): Entry 80 of Notification No. 12/2017-CT(Rate) exempts services of training or coaching in recreational activities relating to arts or culture only when provided by charitable entities registered under Section 12AA or Section 10(23C) of the Income Tax Act, 1961. Mr. Dhanwan is an individual registered supplier — not a charitable entity. The exemption is therefore not available and ₹90,000 is taxable.

Item V — ₹30,000 (EXEMPT): Under Entry 12 of Notification No. 12/2017-CT(Rate), services by way of renting of residential dwelling for use as residence are exempt from GST. The flat is rented to Mr. Sakshi in his personal capacity for his own residence. The fact that Mr. Sakshi is a proprietor of a GST-registered firm is irrelevant since the renting is not for business use. (Note: The 2022 amendment making such renting taxable under RCM when tenant is registered was effective from 18.07.2022 and does not apply to January 2021.) Hence, ₹30,000 is fully exempt.

Supply under GST – Analysis of Both Activities

(i) Water Cooler Donation by Mr. Sonu:

Under Section 7 of the CGST Act, 2017, supply is defined as provision of goods or services for consideration by a taxable person in the course or furtherance of business.

In this case, there are two distinct transactions:

First Transaction (Mallverns Bros to Sonu): This IS a supply under GST. Mallverns Bros, being a registered person, is providing a water cooler to Sonu for a consideration of ₹25,000. The engraving service, being customization done as part of fulfilling the sales contract, forms part of the same supply. Malverns Bros is acting in the course of business, consideration is paid, and all elements of supply are satisfied.

Second Transaction (Sonu to Temple): This IS NOT a supply under GST. When Sonu donates the water cooler to the temple, there is no consideration involved. The donation is a voluntary, gratuitous transfer of goods. Under Section 7(1), the absence of consideration is fatal to supply. Even though Section 7(2)(d) treats free supply of goods as supply, that section applies only when a taxable person gives goods for free in the course of business; Sonu (an individual donor) is not a taxable person engaged in business of donating.

Conclusion: The purchase from Mallverns Bros is a taxable supply. The subsequent donation is not a supply under GST law.

(ii) Management Consultancy Services Received Free of Cost:

This IS NOT a supply under GST law.

Reason: The fundamental requirement for supply under Section 7(1) is that it must be made "for consideration." In this case, Weiner Ltd received management consultancy services from its head office without any consideration (free of cost).

While the services are related to business operations of a taxable person, the complete absence of consideration disqualifies it from being a supply. The definition of supply is not satisfied when one of its essential elements – consideration – is missing. The fact that the services are provided by a related entity (parent company) does not change this principle. Lack of consideration means lack of supply under GST, regardless of relationship between parties.

Conclusion: Services received free of cost cannot be treated as supply under GST. No GST liability arises in respect of these services.

Answer: YES, M/s. Bob & Sons is allowed to generate E-way bill.

M/s. Bob & Sons can generate an E-way bill for the intra-state supply to M/s. Lalit Kirana Stores in accordance with Rule 46 of the CGST Rules, 2017.

Reasoning:

1. E-way Bill Requirement: According to Rule 46 of CGST Rules, 2017, an E-way bill is mandatory for movement of taxable goods having value exceeding ₹50,000 (for intra-state movement). The goods valued at ₹2,50,000 clearly exceed this threshold, making E-way bill generation compulsory.

2. Default of Composition Dealer: Although M/s. Lalit Kirana Stores has failed to submit GST CMP-08 (self-assessment tax statement) for two consecutive quarters, this makes them liable for cancellation of registration under Section 29(2)(c) of CGST Act, 2017. However, such cancellation is discretionary and initiated by the Commissioner—it does not automatically invalidate the existing registration at the time of placing the order.

3. Supplier's Right to Generate E-way Bill: E-way bill is a compliance mechanism for tracking movement of goods, not a privilege dependent on the recipient's registration status. The CGST Rules do not restrict registered suppliers from supplying to composition dealers in default, nor do they prohibit E-way bill generation in such transactions. M/s. Bob & Sons, being a registered dealer, retains the right and obligation to generate the E-way bill.

4. No Legal Obstacle: There is no provision in the CGST Act or CGST Rules that prevents M/s. Bob & Sons from supplying to M/s. Lalit Kirana Stores or from generating the E-way bill. The supplier's liability and compliance do not hinge on the recipient's GST filing status.

5. Practical Consequence: If M/s. Lalit Kirana Stores' registration is subsequently cancelled, the transaction would become a supply to an unregistered person. Even then, E-way bill would remain required under Rule 46 for movement of goods exceeding ₹50,000 in value. Therefore, cancellation would not retroactively invalidate the E-way bill generated at the time of supply.

(i) Whether e-invoice is mandatory for the transaction in April 2023:

As per Rule 48(4) of the CGST Rules, 2017, every registered person whose aggregate turnover in any preceding financial year exceeds the notified threshold is required to prepare a tax invoice by uploading specified particulars on the Invoice Registration Portal (IRP) and obtain an Invoice Reference Number (IRN) — this process is known as e-invoicing.

As per Notification No. 17/2022-Central Tax dated 01.08.2022 (effective from 1st October 2022), e-invoicing became mandatory for registered persons having aggregate turnover exceeding ₹10 Crore in any preceding financial year.

In the given case, Dream World Pvt. Ltd had an aggregate turnover of ₹12 Crore in FY 2022-23, which exceeds ₹10 Crore. The supply in April 2023 is made to Nightmare Ltd, a registered taxable person, making it a B2B (Business-to-Business) transaction, which is squarely covered under the e-invoicing mandate.

Conclusion (i): E-invoice is mandatory for this transaction. Dream World Pvt. Ltd must generate the invoice through the IRP and obtain a valid IRN before or at the time of supply.

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(ii) Whether e-invoice is mandatory if Nightmare Ltd is a SEZ unit:

It is important to distinguish between the position of a SEZ unit as a supplier and as a recipient. As per Notification No. 13/2020-Central Tax (as amended), SEZ units acting as suppliers are exempted from the requirement of issuing e-invoices. However, no exemption is granted to a supplier merely because the recipient happens to be a SEZ unit.

In the present case, Dream World Pvt. Ltd is the supplier and is not a SEZ unit. The supply made to a SEZ unit (Nightmare Ltd) is a zero-rated supply under Section 16 of the IGST Act, 2017, but zero-rated supplies to SEZ units are explicitly covered within the scope of e-invoicing requirements. Rule 48(4) of the CGST Rules applies to supplies made to registered persons, and SEZ units are registered under GST.

Conclusion (ii): Even if Nightmare Ltd is a SEZ unit, e-invoice remains mandatory. Dream World Pvt. Ltd must still generate the invoice through IRP and obtain an IRN, as the exemption for SEZ units applies only when a SEZ unit itself is the issuer (supplier) of the invoice, not when it is the recipient.

Mr. Atul is NOT allowed to use the balance lying in the Electronic Credit Ledger to make payment of the tax liability payable as a consequence of the legal proceeding.

Legal Position:

Under Section 49 of the CGST Act, 2017 and the corresponding provisions of the SGST Act, input tax credit available in the Electronic Credit Ledger can be utilized for payment of IGST, CGST, SGST, and other prescribed duties in the manner and order of priority specified. However, this right to utilize ITC is subject to certain restrictions and conditions.

Key Restriction:

A critical restriction under GST law is that the input tax credit lying in the Electronic Credit Ledger cannot be used to pay tax liability, penalty, or interest that arises as a consequence of any legal proceeding, order passed by any adjudicating officer, or notice issued under GST law. Such liabilities arising from disputes, legal proceedings, or enforcement actions must be paid through other modes of payment (cash, cheque, online transfer, etc.).

Application to Present Case:

In Mr. Atul's case, the tax liability of ₹80,000 (IGST) has arisen directly as a consequence of a legal proceeding initiated under GST law. This falls squarely within the category of liabilities that cannot be discharged using the Electronic Credit Ledger, even though the balance of ₹1,20,000 is sufficient to cover the liability.

Conclusion:

Mr. Atul must pay the tax liability of ₹80,000 through cash payment or other prescribed modes. The balance of ₹1,20,000 in the Electronic Credit Ledger remains available for utilization towards regular GST liability (output tax on supplies) in future months, subject to the order of priority prescribed under the GST rules.

OPTION 1: Reversal of ITC in Case of Non-Payment of Tax by Supplier and Recoupment

Relevant Provision: Section 16(2)(c) of the CGST Act, 2017 lays down that one of the conditions for availing Input Tax Credit (ITC) is that the tax charged in respect of such supply has been actually paid to the Government by the supplier. Rule 37A of the CGST Rules, 2017 operationalises this condition.

Mechanism of Reversal:

Where ITC has been availed by a registered recipient based on details appearing in GSTR-2B, but the supplier has not paid the corresponding tax (i.e., has not filed GSTR-3B or has filed GSTR-3B without discharging the tax liability), the ITC so availed becomes ineligible.

The recipient is required to reverse such ITC on or before the 30th November of the financial year succeeding the financial year in which the ITC was availed, or the date of furnishing the annual return, whichever is earlier.

Interest Liability: The recipient shall be liable to pay interest under Section 50 of the CGST Act, 2017 on the reversed amount, computed from the date of availing the ITC until the date of its reversal.

Recoupment of Reversed ITC: If the supplier subsequently pays the tax and files the return, the reversed ITC may be re-availed (recouped) by the recipient. Such re-availment can be done after the tax is reflected in the recipient's GSTR-2B. No interest is payable on re-availment.

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OPTION 2: Procedure for Revocation of Cancellation of Registration (Suo Motu Cancellation)

Relevant Provision: Section 30 of the CGST Act, 2017 read with Rule 23 of the CGST Rules, 2017 governs revocation of cancellation of registration.

Application for Revocation:

A registered person whose registration has been cancelled suo motu by the proper officer (i.e., on the officer's own motion under Section 29(2)) may apply for revocation of such cancellation. The application must be filed in Form GST REG-21 within 30 days from the date of service of the cancellation order. The proper officer may, for sufficient cause, extend this period by a further 30 days. Additionally, the Additional Commissioner or Joint Commissioner of State Tax may extend the period by up to 30 more days (total possible extension: 90 days beyond the initial 30 days).

Pre-conditions before Filing Application: Before the revocation application is entertained, the applicant must:
(i) File all pending returns up to the effective date of cancellation.
(ii) Pay all outstanding tax, interest, penalty, and late fees due.

Processing of Application by Proper Officer:
- If the proper officer is satisfied, he shall revoke the cancellation by order in Form GST REG-22 within 30 days of receipt of the application.
- If not satisfied, the officer shall issue a notice in Form GST REG-23 requiring the applicant to show cause within 7 working days.
- The applicant shall file a reply in Form GST REG-24.
- The officer shall pass an order within 30 days of receipt of such reply — either revoking the cancellation or rejecting the application by order in Form GST REG-05.

Note: Revocation restores the registration as if it was never cancelled, enabling the taxpayer to resume compliance obligations.

Rule 86C of the CGST Rules, 2017 deals with the restriction on filing of GSTR-1 where a mismatch is detected between the tax liability declared in GSTR-1 and the tax actually paid through GSTR-3B for the corresponding tax period.

Triggering Condition: Where the tax payable declared by a registered person in GSTR-1 for a tax period exceeds the tax paid by such person as per GSTR-3B filed for the same corresponding tax period, the system flags such discrepancy. In Mr. Sameer's case, this excess has caused a system-level restriction preventing him from filing GSTR-1 for the subsequent tax period.

Procedure to be followed by the Department (Proper Officer):

(1) Upon detection of such discrepancy, the proper officer may, after giving an opportunity of being heard to Mr. Sameer, restrict him from filing GSTR-1 for the subsequent tax period on the common portal.

(2) An intimation of the restriction shall be communicated to Mr. Sameer electronically on the common portal, specifying the reason, i.e., the excess of tax liability in GSTR-1 over tax paid in GSTR-3B.

(3) The proper officer shall examine any representation made by Mr. Sameer explaining the reasons for such difference, and based on the explanation or payment, decide whether to lift the restriction.

Procedure to be followed by Mr. Sameer:

(1) Option 1 – Payment of differential tax: Mr. Sameer may pay the differential amount (i.e., tax payable as per GSTR-1 minus tax paid as per GSTR-3B) along with applicable interest under Section 50 of the CGST Act, 2017. Upon such payment, the restriction on filing GSTR-1 shall be removed.

(2) Option 2 – Submission of explanation: Mr. Sameer may submit a written explanation to the proper officer through the common portal, explaining the reasons for the difference. If the proper officer is satisfied with the explanation (for instance, where the difference arises due to an exempt supply or zero-rated supply not involving tax payment), the restriction shall be lifted.

(3) If neither payment is made nor satisfactory explanation is provided, the restriction shall continue and Mr. Sameer will remain unable to file GSTR-1 for the subsequent period until the issue is resolved.

Removal of Restriction: The proper officer, after considering the payment made or explanation furnished, shall pass an appropriate order removing or continuing the restriction and communicate the same to Mr. Sameer on the common portal.

Conclusion: Mr. Sameer should either pay the shortfall amount immediately or furnish a proper explanation to the department. Failure to resolve this will result in cascading non-compliance since the inability to file GSTR-1 will also affect recipients' ITC claims.