In exercise of the powers conferred by Section 164 of the Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”), the Central Government, on the recommendations of the Council, has issued a Notification No. 75/2019-Central Tax dated 26th December, 2019 to amend the Central Goods and Services Tax Rules, 2017 (“CGST Rules, 2017”) majorly with regard to the following-
1. Changes in Rule 36(4) of CGST Rules, 2017 from 1st January, 2020- recipients can claim provisional Input Tax Credit (“ITC”) in GSTR-3B to the extent of 10% instead of earlier 20% of the total ITC available in GSTR-2B for the month;
2. Insertion of new Rule 86A providing conditions of use of amount available in electronic credit ledger.
Now, we would like to discuss and deal herein only with regard to change New Rule 86A of CGST Rules, 2017 from 26th December, 2019. The Rule 86A in words of the law is-
“86A. Conditions of use of amount available in electronic credit ledger.
(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-
a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-
issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
without receipt of goods or services or both; or
b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.
(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.
(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.”
It is stated that Rule 36(4) of CGST Rules, 2017 [w.e.f. 01st January, 2022 there is no relevance of restriction on availment of ITC under Rule 36(4)] is regarding availment of ITC restriction whereas conditions and restriction on use of amount available in Electronic Ledger is covered under Rule 86A & 86B of CGST Rules, 2017. Please note that ITC once availed as per Section 16 (Rules thereto i.e. 36) is credited to Electronic Credit ledger of the registered person and can be utilized for payment towards output tax as provided in Section 49 of the CGST Act, 2017 subject to the conditions and restrictions mentioned in Rule 86A & 86B.
This is another step taken by the Government to restrict the ITC available to the tax payer. According to this rule the Commissioner or any other officer not below the rank of Assistant Commissioner authorized by him can restrict the ITC. However, such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction. The ITC can be restricted in the following circumstances.
a) ITC availed on invoices/debits notes/other documents of the supplier who has been found non-existent or not to be conducting business, or
b) ITC availed on invoices/debits notes/other documents without receipt of goods or services, or
c) ITC availed on invoices/debits notes/other documents of the supplier where the tax charged has not been paid to the Government, or
d) Where the registered person availing ITC has been found non-existent or not to be conducting business, or
e) Where the registered person availing ITC is not in possession of invoices/debits notes/other documents.
With the introduction of this rule, tax payer has to be very cautious about the selection of their supplier and to make proper due diligence of the supplier before executing any transaction otherwise there may a trouble. The action may be taken in case where ITC has been taken fraudulently and ineligible credit taken.
Recently, the Hon’ble Gujrat High Court vide its order dated 23.02.2022 in the matter of New Nalbandh Traders Vs. State of Gujrat & 2 other(s), has analysed Rule 86(A) as under:-
A. Supplier found non-existent or not conducting business at its registered place- It has been availed on the basis of the documents prescribed under Rule 36 i.e. tax invoice, debit note etc issued by a registered supplier who has been found non-existent or not to be conducting any business from any place for which registration has been obtained.
B. Non receipt of goods or services or both: It has been availed on the basis of the documents prescribed under Rule 36 i.e. tax invoice, debit note etc without receipt of goods or services or both.
C. Tax not paid into the Government treasury: It has been availed on the basis of documents prescribed against which no tax has been paid into the Government treasury.
D. Recipient found non-existent or not conducting business at its registered place: It has been availed on the basis of documents prescribed under Rule 36 i.e. tax invoice, debit note etc issued by a registered person availing the credit (i.e. recipient) who has been found non-existent or not to be conducting any business from any place for which registration has been obtained.
E. Availing of credit without documents: The registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36.
The Hon’ble Court has observed that Rule 86A undoubtedly could be said to have conferred drastic powers upon the proper officers if they have reason to believe that the activities or invoices are suspicious. The Rule 86A is based on “reason to believe”. “Reason to believe” must have a rational connection with or relevant bearing on the formation of the belief. It is a subjective term and can be interpreted differently by different individuals. Prima facie, it appears that the Rule 86A does not even contemplate for issue of any show-cause notice or intimation notice. In such circumstances, the person affected may be taken by surprise when he would go to the portal to pay taxes and finds that his ITC is not usable.
In Samay Alloys India Pvt. Ltd. Vs. State of Gujarat, (Special Civil Application No.18059 of 2021) decided on 03.02.2022, this Court took the view in para 35 that the Rule 86A is not the Rule which entitles the proper Officer to make debit entries in the electronic credit ledger of the registered person. The Rule merely allows the proper officer to disallow the registered person the debit from the electronic credit ledger for the limited period of time and on a provisional basis. This Court took the view that in case the debit entries are made by the proper Officer, the same would tantamount to permanent recovery of the input tax credit and the permanent recovery is governed by the statutory provisions (Sections 73 or 74 respectively of the CGST Act as the case may be) and it would certainly travels beyond the plain language and the underlined intent of Rule 86A.
Rule 86A has two pre-requisites to be fulfilled before the power of disallowing of debit of suitable amount to the Electronic Credit Ledger or blocking of ECL to the extent of the amount fraudulently or wrongly availed of is exercised. The first pre-requisite is of the Competent Authority or the Commissioner 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 disallow the debit of the determined amount to the ECL or cannot block the ECL even to the extent of amount found to be fraudulently or wrongly availed of.
It must be noted that the power under rule 86-A which in effect is the power to block ECL to the extent stated earlier is drastic in nature. It creates a disability for the tax payer to avail of the credit in ECL for discharge of his tax liability, which he is otherwise entitled to avail. Therefore, all the requirements of rule 86-A would have to be fully complied with before the power thereunder is exercised. When this rule requires arriving at a subjective satisfaction which is evident from the use of words, “must have reasons to believe”, the satisfaction must be reached on the basis of some objective material available before the authority. It cannot be made on the flights of one’s fancies or whims or imagination. The power under rule 86-A is an administrative power with quasi-judicial hues exhibited in the aforestated twin pre-requisites and has civil consequences for a tax payer in the sense, it acts as an obstruction to right of a tax payer to utilise the credit available in his ECL. Any administrative power having quasi-judicial shades, which brings civil consequences for a person against whom it is exercised, must answer the test of reasonableness. It would mean that the power must be exercised fairly and reasonably by following the principles of natural justice.
In the case of Maneka Gandhi Vs. Union of India : AIR 1978 SC 597 , it was held that the principle of reasonableness which legally as well as philosophically, is an essential element of equity or non-arbitrariness and it pervades Article 14 like a brooding omnipresence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14. Fair and reasonable exercise of power would be there only when the power is exercised in the manner prescribed in the provision of law conferring the power and for the purpose for achievement of which it exists. This would underline the importance of existence of reasons to believe that there is fraudulent or erroneous availment of credit standing in the ECL. In other words, the power under rule 86-A cannot be exercised unless there is a subjective satisfaction made on the basis of objective material by the authority.
As regards the following of principles of natural justice, the law is now well settled. In cases involving civil consequences, these principles would be required to be followed although, the width, amplitude and extent of their applicability may differ from case to case depending upon the nature of the power to be exercised and the speed with which the power is to be used. Usually, it would suppose prior hearing before it’s exercise (See Swadeshi Cotton Mills Vs. Union of India : (1981) 1 SCC 664 and Nirma Industries Limited and another Vs. Securities and Exchange Board of India : (2013) 8 SCC 20 ). But, it is not necessary that such prior hearing would be granted in each and every case. Sometimes, the power may be conferred to meet some urgency and in such a case expedition would be the hallmark of the power. In such a case, it would be practically impossible to give prior notice or prior hearing and here the rule of natural justice would expect that at least a post decisional hearing or remedial hearing is granted so that the damage done due to irrational exercise of power, if any, can be removed before things get worse. In Smt. Maneka Gandhi (supra), it was laid down that where there is an emergent situation requiring immediate action, giving of prior notice or opportunity to be heard may not be practicable but a full remedial hearing would have to be granted. The power conferred upon the Commissioner under rule 86-A is one of such kind. It has civil consequences though for a limited period not exceeding one year and has an element of urgency which perhaps explains why the rule does not expressly speak of any show cause notice or opportunity of hearing before the ECL is blocked.
Of course, in order to guard against arbitrary exercise of power, the rule creates certain checks which are found in the twin requirements explained by us earlier. But, in our view, that may not be enough, given the nature of power, and what settled principles of law tell us in the matter. They would, in such a case, require this Court to read into the provisions of rule 86-A something not expressly stated therein, and so, we find that post decisional or remedial hearing would have to be granted to the person affected by blocking of his ECL. We may add that such post decisional hearing may be granted within a reasonable period of time which may not be beyond two weeks from the date of the order blocking the ECL. After such hearing is granted, the authority may proceed to confirm the order for such period as may be permissible under the rule or revoke the order, as the case may be.
The second pre-requisite of rule 86-A is of recording of reasons in writing. It comes with the use of the word “may”, which, in our opinion, needs to be construed as conveying an imperative command of the rule maker, and that means, reasons must be recorded in writing in each and every case. This is because of the fact that any order which brings to bear adverse consequences upon the person against whom the order is passed, must disclose the reasons for it so that the person affected thereby would know why he is being made to suffer or otherwise he would not be able to seek appropriate redressal of his grievance arising from such an order. Right to know the reasons behind an administrative order having civil consequences is a well embedded principle forming part of doctrine of fair play which runs like a thread through the warp and weft of the fabric of our Constitutional order made up by Articles 14 and 21 of the Constitution of India. In the case of Andhra Bank V/s. Official Liquidator : (2005) 3 SCJ 762 , the Apex Court has held that an unreasoned order does not subserve the doctrine of fair play. It then follows that the word, “may” used before the words, “for the reasons recorded in writing” signifies nothing but a mandatory duty of the competent authority to record reasons in writing.
There is another reason which we would like to state here to support our conclusion just made. The power under rule 86- A is of enabling kind and it is conferred upon the Commissioner for public benefit and, therefore, it is in the nature of a public duty. Essential attribute of a public duty is that it is exercised only when the circumstances so demand and not when they do not justify its performance (see Commissioner of Police, Bombay Vs. Gordhandas Bhanji : AIR (39) 1952 Supreme Court 16). It would then mean that justification for exercise of the power has to be found by the authority by making a subjective satisfaction on the basis of objective material and such satisfaction must be reflected in the reasons recorded in writing while exercising the power. (Vide: Dee Vee Projects Ltd. v/s. Union of India & Ors., Writ Petition No.2693/2021, dated 11.02.2022 (Bombay High Court)).
Examined in the light of above principles of law, the provisions made in rule 86-A would require the Competent Authority to first satisfy itself, on the basis of objective material, that there are reasons to believe that credit of input tax available in ECL has been fraudulently or wrongly utilised and secondly to record these reasons in writing before the order of disallowing debit of requisite amount to the ECL or requisite refund of unutilised credit, is passed or otherwise the order of blocking the ECL under rule 86-A would be unsustainable in the eye of law.
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