Case Law Details
SUF Enterprises Vs Assistant Commissioner Central Tax (Karnataka High Court)
The Karnataka High Court heard a writ petition challenging the action of the tax authorities in blocking the petitioner’s electronic credit ledger and creating a negative balance.
The electronic credit ledger was blocked on the ground that credit had been claimed without receipt of goods or services and that the supplier was found to be non-functioning.
The petitioner contended that the power to block the electronic credit ledger is exercised under Rule 86A of the Central Goods and Services Tax Rules, 2017. It was argued that although the Rule does not expressly require a prior hearing, courts have interpreted the provision to require a pre-decisional hearing before blocking the electronic credit ledger. Reliance was placed on the Karnataka High Court judgment in K-9 Enterprises, Kwality Metals, K-9 Industries v. State of Karnataka.
Counsel appearing for the revenue was unable to dispute the petitioner’s assertion that no notice had been issued before blocking the ledger.
The Court referred to paragraph 8.13 of the judgment in K-9 Enterprises, wherein it was held that failure to provide a pre-decisional hearing before blocking the electronic credit ledger under Rule 86A constituted a serious illegality and that such orders deserved to be set aside.
Taking note of the admitted position that no notice had been issued, the High Court set aside the action of blocking the electronic credit ledger. The respondent authorities were directed to immediately unblock the ledger upon receipt of the Court’s order to enable the petitioner to file returns.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioner has called in question the action of respondent No.1 in blocking the electronic credit ledger and creating a negative balance in terms of Annexure-A.
2. On perusal of Annexure-A, it is noticed that the electronic credit ledger has been blocked with the reason assigned as “Credit claimed without receipt of goods/services, supplier found non-functioning”.
3. Learned counsel for the petitioner submits that the power to block the credit ledger is by virtue of Rule 86A of the Central Goods and Services Tax Rules, 2017. It is further submitted that though there is no statutory mandate regarding hearing to be afforded before such power is exercised, however the Courts have interpreted that before blocking the credit ledger in exercise of power under Rule 86A, the assesses are required to be heard and reliance is placed on the judgment of this Court in the case of K-9 Enterprises, Kwality Metals, K-9-Industries v. The State of Karnataka, The Assistant Commissioner of Commercial Taxes, Belagavi reported in 2024 (10) TMI 491 – Karnataka High Court.
4. Learned counsel, Sri. Akash B. Shetty appearing for the respondent – revenue is not able to controvert regarding the assertion that there was no notice before the action of blocking the credit ledger.
5. Perused the order passed in the case of K-9 Enterprises and paragraph No.8.13 reads as follows:
“8.13 In view of the aforesaid discussion, we are of the considered opinion that the learned Single Judge clearly fell in error in coming to the conclusion that a pre-decisional hearing was not required to have been provided/granted to the appellants by the respondents-revenue prior to passing the impugned orders blocking the ECL of the appellants and consequently, the said findings recorded by the learned Single Judge deserve to be set aside. Point No.1 is accordingly answered in favour of the Appellant and against the respondents-revenue by holding that respondents-revenue committed a grave and serious error/illegality/infirmity in not providing/granting a pre-decisional hearing to the Appellant before passing the impugned order blocking its Electronic Credit Ledger under Rule 86A of the CGST Rules and consequently, the impugned orders deserve to be set aside.”
6. Taking note of the admitted position that no notice was issued, the action of blocking the credit ledger at Annexure-A is set aside. Respondent is directed to unblock the electronic credit ledger of the petitioner immediately upon receipt of copy of the order so as to enable the petitioner to file returns.
7. Liberty is reserved in favour of the respondent to proceed against the petitioner, if circumstances are so made out in accordance with law and taking note of the observations made in the case of K-9 Enterprises in W.A.No.100425/2023 and connected matters. All contentions are kept.
Accordingly, petition is disposed of.
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