The Real Story: When Logic Met a Digital Wall
It began with a merger that should have been seamless.
Flytxt Mobile Solutions Pvt. Ltd., a Kerala-based IT company, had merged with another entity from Haryana. The merger was NCLT-approved, assets were transferred, liabilities were settled, and business moved forward — except for one thing.
When the company tried to transfer the unutilized Input Tax Credit (ITC) from the Haryana unit to the new GSTIN in Kerala, the GST portal said “No.”
Reason?
Different States. Different GSTINs. Same taxpayer, but the system couldn’t see it that way.
The Law Was Clear — The Portal Was Not
The matter went before the Authority for Advance Ruling (AAR), Kerala, in Flytxt Mobile Solutions (P.) Ltd., In re – [2025] 179 taxmann.com 545 (AAR – Kerala).
Flytxt argued that since the merger was approved by NCLT and all assets and liabilities had passed, the CGST and IGST balance should also follow. The department, however, pointed to the portal’s limitation and State-based registration system.
The AAR took a rational, justice-oriented stance:
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Section 18(3) of the CGST Act read with Rule 41 allows transfer of unutilized ITC when the constitution of a registered person changes — including mergers and amalgamations.
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There is no restriction that such transfer must occur within the same State.
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Since only CGST and IGST were being transferred, and SGST wasn’t involved, there was no statutory bar.
Ruling:
Flytxt could rightfully transfer its unutilized ITC (CGST and IGST) from Haryana to Kerala despite different GSTINs.
The AAR overruled the portal’s denial, affirming that law prevails over software logic.
The Larger Truth: When ITC Becomes a Battle
Flytxt’s story mirrors a wider issue — the silent struggle of genuine taxpayers whose Input Tax Credit is blocked, restricted, or lost in system errors.
Every day, businesses face notices, mismatches, and blocked credits under Rule 86A, often without fault.
Their working capital — locked in digital ledgers — becomes a compliance casualty.
But knowledge of the law can turn the tide.
When ITC Is Blocked Under Rule 86A
The department may block ITC if it believes the credit was availed fraudulently. But belief is not proof. Courts have held that ITC can’t be blocked without tangible evidence.
Key Precedents:
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Dee Vee Projects Ltd. v. Union of India (2021) — Bombay HC held that blocking ITC requires reasoned belief, not suspicion.
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Kalpsutra Gujarat Ltd. v. State of Gujarat (2022) — courts stressed the principle of proportionality and fairness.
Remedy Path:
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Seek written reasons for blocking — the department must communicate the basis.
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File a representation citing lack of natural justice under Rule 86A(2).
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If unresolved, approach High Court under Article 226.
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Remember — ITC blocking cannot exceed one year; after that, it lapses automatically.
When ITC Is Challenged During Scrutiny or Audit
Common causes:
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Supplier failed to file GSTR-1 or pay tax.
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Invoice not reflecting in GSTR-2B.
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ITC claimed on ineligible expenses (e.g., corporate gifts, canteen).
What to Do:
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Maintain vendor-wise reconciliation — invoice, payment proof, and receipt of goods/services.
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Argue based on Section 16(2)(c) — bona fide recipient can’t be penalized for supplier’s default if transaction is genuine (Bharti Airtel Ltd. v. Union of India, Delhi HC).
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Respond to notices precisely, with facts and law — vague or delayed replies often strengthen the department’s hand.
When ITC Transfer Is Denied in Mergers, Demergers, or Reorganizations
Mergers often face portal-based resistance, especially across States. The Flytxt ruling has clarified this grey area.
Action Plan:
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File Form ITC-02 duly certified by a CA, enclosing NCLT order.
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In inter-State mergers, cite Section 18(3) and judicial rulings like Flytxt (AAR Kerala) to establish that the law overrides system limitations.
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If the portal blocks transfer, file a manual representation under CBIC Circular No. 133/03/2020-GST, which allows manual processing where electronic forms fail.
When ITC Is Wrongly Rejected or Refund Denied
Departments sometimes reject ITC during adjudication or refund processing due to clerical or system errors.
Remedies:
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File rectification under Section 161 for errors apparent on record.
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Appeal under Section 107 within three months if adjudication is adverse.
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If refund is denied due to portal error, approach the jurisdictional officer with audit trail and claim under “technical glitch” category — CBIC has allowed such manual relief in circulars.
Beyond Compliance — The Principle of Fairness
The GST framework was built on the promise of a seamless credit chain. But in practice, system rigidity, mismatched returns, and mechanical restrictions often choke liquidity for compliant taxpayers.
The courts have repeatedly held that ITC is a vested right, not a concession — it cannot be denied due to administrative or technological deficiencies.
“When the portal fails to see the merger, the law must.”
Professional Insight: Protecting ITC in Your Organization
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Monthly ITC Audit: Match 2B, books, and vendor GSTR-1 regularly.
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Supplier Vetting: Pay vendors only after verifying tax compliance.
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Legal Tracking: Maintain repository of merger orders, correspondence, and ITC-02 filings.
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Escalation Trail: Every blocked ITC must have a documented follow-up and officer correspondence.
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Litigation Preparedness: Keep certified reconciliations ready — in GST, paperwork wins protection.
Moral of the Story
Flytxt’s case was more than a legal ruling — it was a message.
Technology may automate compliance, but it cannot override justice.
When genuine credit is denied, taxpayers must rise beyond system limitations and fight for their rightful dues.
The digital wall may say “System Error”, but the law says “Rightful Credit.”
In GST, Input Tax Credit is not a privilege — it’s your capital in transit.
Guard it like cash, defend it like property, and claim it like your right.
