Hon’ble Punjab & Haryana High Court (‘HC’) in the case of M/s Rajnandini Metals Limited (petitioner) has set aside the order passed by GST authorities blocking the electronic credit ledger stating that the order passed is without any application of mind and “reasons to believe”. Captioned order has been analyzed in this update.
A. FACTS OF THE CASE
- The petitioner is a public limited company engaged in manufacturing of copper wire rod etc.
- The electronic credit ledger (ECL) of petitioner was blocked by GST authorities based on a communication received from Delhi North Commissionerate that one of the suppliers of petitioner is found non-existing.
B. CONTENTION OF THE PETITIONER
- That the SCN for cancellation of registration was issued to captioned supplier however the same was dropped subsequently.
- That the intent of Rule 86A was to secure interest of revenue and it is sort of preventive measure. The petitioner is a running manufacturing unit and there is no possibility of fly by night. The interest of revenue is always secured.
- The mis-appropriation or fraud has been committed by suppliers of the petitioner for which the petitioner could not be deprived from his valuable right of ITC.
C. CONTENTION OF THE DEPARTMENT
- That the GST registration of captioned supplier has been subsequently cancelled on 27th July, 2021.
- That the reason for initiating proceedings is an intelligence report received from CIU-CGST Vadodara Zone which has informed about the petitioner receiving ITC from seven different suppliers.
D. OBSERVATION AND DECISION BY HC
- Power under Rule 86A of CGST rules could be exercised where the prescribed officer has reason to believe that credit of ITC available in electronic credit ledger has either been fraudulently availed or the assessee is ineligible. Thus, the exercise need satisfaction of the prescribed authority.
- Hon’ble Gujarat HC in the matter of M/s New Nalbandh Traders has stated that the “Reason to believe” must have a rationale connection with or relevant bearing on the formation of the belief.
- That the reason to invoke the power conferred by rule 86A against the petitioner is an intelligence report. Merely by recording that some investigation is going on a drastic far-reaching action under rule 86A cannot be sustained.
- There is no reason recorded by the Authority which would show independent application of mind that can constitute reasons to believe and accordingly the impugned order is set aside.
F. Our comments
Hon’ble P & H High Court has again reiterated the fact that the order passed has to be self-sustainable and the authorities has to have “reasons to believe” based on supporting material which primafacie establishes that the petitioner is guilty of fraudulent transaction or is ineligible under section 16 of the CGST Act before invoking the provisions of Rule 86A of CGST rules.
Rule 86A has two pre-requisites to be fulfilled before the power of blocking of ECL to the extent of the amount fraudulently or wrongly availed of is exercised. The first pre-requisite is of the Authority having been satisfied on the basis of the material available before him that blocking of ECL for the afore-stated reasons is necessary. The second pre-requisite is of recording the reasons in writing for such an exercise of the power. From the language used in rule 86-A it becomes very clear that unless both these pre-requisites are fulfilled, the authority cannot block the ECL.
(Author can be reached at dinesh.singhal@snr.company or cadineshsinghal@gmail.com).
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