Hook Introduction

Namaste DOST.

GST disputes rarely arise because taxpayers act dishonestly.

They arise because the law looks flexible, the portal feels permissive, and the statute quietly demands discipline.

This amalgamation judgment is a reminder of that uncomfortable truth.

Summary

This case arose out of an approved scheme of amalgamation, where the transferor company held accumulated unutilised Input Tax Credit (ITC). After amalgamation, instead of transferring the entire ITC to the transferee company through FORM GST ITC-02, the assessee adopted a split approach: a portion of ITC was transferred via ITC-02, while the balance ITC was claimed as refund under Section 54(3) of the CGST Act, 2017.

Although the refund was initially sanctioned, the revenue authorities objected and challenged the legality of such splitting. The dispute ultimately reached the Gujarat High Court.

The Court examined Section 18(3), Rule 41, Section 54(3), and critically, Section 87 of the CGST Act, which governs the legal consequence of amalgamation. Relying on statutory interpretation principles and Supreme Court decisions discussed within the judgment, the Court held that in an amalgamation, accumulated ITC cannot be partly transferred and partly claimed as refund. The Court upheld the rejection of the refund claim.

Facts of the Case (Background)

The petitioner companies were parties to a valid and approved scheme of amalgamation. Upon approval, the amalgamation took effect, resulting in the transferor entity merging into the transferee entity.

At the time of amalgamation, the transferor company had accumulated unutilised ITC in its electronic credit ledger. Instead of transferring the entire accumulated ITC to the transferee company, the assessee followed a hybrid method:

• A substantial portion of ITC was transferred to the transferee company through FORM GST ITC-02, as contemplated under Rule 41(1) of the CGST Rules, 2017.

• The remaining ITC was claimed as refund under Section 54(3) on the ground of zero-rated supplies.

Initially, the refund claim was sanctioned by the department. Subsequently, the revenue authorities raised objections, contending that such bifurcation of ITC was inconsistent with the statutory framework governing amalgamation and ITC transfer.

Legal Issue

The principal issue before the Court was:

Whether, in a case of amalgamation, accumulated unutilised ITC can be partly transferred to the transferee company through FORM GST ITC-02 and partly claimed as refund under Section 54(3) of the CGST Act, especially in light of the consequences flowing from Section 87 of the Act.

Arguments

Arguments by the Petitioner

The petitioner contended that:

• Section 18(3) of the CGST Act and Rule 41 of the CGST Rules do not expressly mandate the transfer of the entire unutilised ITC.

• The absence of the word “entire” indicates that partial transfer is permissible.

• Where the legislature intended to mandate complete transfer, it has explicitly used the word “entire” elsewhere.

• Refund under Section 54(3) is a statutory facility, which was lawfully claimed and even sanctioned by the department.

• Reading a compulsory “entire ITC transfer” requirement into the provision would amount to impermissible judicial legislation.

Arguments by the Revenue

The revenue authorities argued that:

• Rule 41 read with Section 18(3) provides a specific statutory mechanism for transfer of ITC in cases of amalgamation.

• Section 87 of the CGST Act stipulates that upon amalgamation, the transferor entity ceases to exist from the effective date.

• Refund under Section 54(3) is not a vested or constitutional right but a restricted statutory facility.

• Allowing partial refund would defeat the legal consequence of amalgamation and permit monetisation of ITC by an entity that no longer exists.

⚖️ Court’s Decision

The Gujarat High Court rejected the petitioner’s approach and upheld the revenue’s objection.

The Court held that refund is not a constitutional right, but a statutory prescription subject to strict legislative conditions. In this context, the Court referred to and relied upon the Supreme Court’s observations in Union of India v. VKC Footsteps (India) (P) Ltd., as discussed in the judgment.

The Court emphasized that:

• FORM GST ITC-02 under Rule 41(1) is the mechanism specifically designed to enable transfer of unutilised ITC in cases of amalgamation.

• The proviso to Section 54(3) acts as a restriction on refund and not as an entitlement.

• The statutory framework does not contemplate a hybrid approach where ITC is partly transferred and partly refunded.

Accordingly, the Court upheld the appellate authority’s order setting aside the refund.

Legal Reasoning & Analysis (In Depth)

The strength of this judgment lies not in a single provision, but in the harmonious reading of multiple provisions.

1 No Judicial Legislation: Absence of the word “entire”

The Court expressly acknowledged that neither Section 18(3) nor Rule 41 uses the phrase “transfer of entire unutilised ITC.” The Court refused to insert this word into the statute.

In this context, the Court relied on settled principles of interpretation of taxing statutes, as discussed in the judgment with reference to Safari Retreats Private Limited, where the Supreme Court reiterated that courts must not add words to a tax statute under the guise of interpretation.

This finding is important: the Court did not convert Section 18(3) into a mandatory “entire ITC transfer” provision.

But the analysis did not stop there.

2 Statutory Consequence of Amalgamation: Section 87

The decisive reasoning emerged from Section 87 of the CGST Act.

Section 87 deals with the legal effect of amalgamation and provides that companies involved in an amalgamation shall be treated as distinct persons only up to the date of the order, and thereafter the amalgamating entity ceases to exist.

The Court held that once amalgamation takes effect:

• The transferor entity loses its independent legal existence.

• ITC, being a business-linked credit, must follow the business.

• Allowing refund to the transferor after amalgamation would contradict the statutory consequence under Section 87.

In simple terms, the Court found it legally inconsistent to permit an entity that has ceased to exist to monetise ITC through refund, even if the statute does not expressly say “entire ITC must be transferred.”

3 Refund is Not a Substitute for Transfer

The Court relied on VKC Footsteps to reiterate that refund under Section 54(3) is a restricted statutory facility. The legislature has consciously confined the circumstances in which refund is permissible.

The Court clarified that:

• ITC-02 is the statutory route for ITC movement in amalgamation.

• Section 54(3) cannot be used as an alternate or residual route to extract ITC value.

• A partial transfer combined with refund undermines the statutory design.

Thus, the defect lay not in how much ITC was transferred, but in splitting ITC between two different statutory regimes.

Important Takeaways (Message for Business Owners)

• In amalgamation cases, ITC cannot be split between transfer and refund.

• Section 87 is critical. Once amalgamation takes effect, the transferor entity cannot behave as a continuing claimant.

• Refund under Section 54(3) is not automatic, even if exports or zero-rated supplies exist.

• ITC-02 is not optional convenience; it is the statutory route for ITC movement in amalgamation.

• Portal acceptance or officer sanction does not cure statutory inconsistency.

Many professionals encounter this issue during restructuring when timelines are tight and systems allow multiple actions. This judgment explains why such flexibility can be misleading.

Why This Matters

This ruling restores structural discipline in GST amalgamations. It aligns ITC treatment with the legal consequence of amalgamation under Section 87, preventing ITC from becoming a cash extraction tool detached from business continuity.

Conclusion

This judgment is not about whether the word “entire” appears in Section 18(3).

It is about statutory consequences.

The Court made it clear that while it will not add words to the law, it will also not permit outcomes that contradict the legal effect of amalgamation. ITC cannot be divided between transfer and refund once Section 87 takes effect.

GST law rewards structure, sequence, and statutory harmony — not convenience.

At GST DOST, we believe clarity today prevents litigation tomorrow.

📞 Need help with amalgamation structuring, ITC transfer, or refund disputes? Contact GST DOST for case-specific support.

FAQ

Q: What was the dispute in this case?

A: Whether accumulated ITC can be partly transferred via ITC-02 and partly claimed as refund after amalgamation.

Q: How did the High Court rule?

A: The Court held that such splitting is impermissible and upheld rejection of the refund claim.

Q: What role does Section 87 play?

A: Section 87 provides that the amalgamating entity ceases to exist, making refund claims inconsistent.

Q: Is refund a right under GST?

A: No. As reiterated using VKC Footsteps, refund is a statutory facility, not a vested right.

Q: Can ITC be claimed as refund after amalgamation?

A: No. As held in this judgment, accumulated ITC in an amalgamation cannot be split between transfer and refund.

References

• Alstom Transport India Limited v. Additional Commissioner
  Gujarat High Court, Judgment dated 23.01.2026

• Union of India v. VKC Footsteps (India) (P) Ltd., (2022) 2 SCC 603
  (relied upon in the judgment)

• Safari Retreats Private Limited
  (referred to in the judgment on interpretation of taxing statutes)

• Statutory Provisions:
  Section 18(3), Section 54(3), Section 87 – CGST Act, 2017
  Rule 41 – CGST Rules, 2017

Written by CA Vikash Dhanania | Reviewed by GST DOST Legal Research Team | Updated on 28/01/2026

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