Pointers made by Gujarat High Court in the case of ‘S. S. Industries Vs. Union of India’ on Rule 86A on legal aspects to be looked upon in case of blocking of ITC by dept –
1. Rule 86A have been placed by NN 75/2019 CT which provides powers to dept to block the ITC where dept has reasons to believe that ITC has been fraudulently availed or is ineligible
2. 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.
3. The Rule 86A is based on “reason to believe”, Which is necessary to be formed for the purpose of blocking the input tax credit in cases of inquiry or investigation into fraudulent transactions
4. “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 SCN or intimation notice.
5. At many times 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.
6. The existence of relevant material is a pre-condition to the formation of the opinion by the dept
7. In the absence of any cogent or credible material, if the subjective satisfaction is arrived at by the authority concerned for the purpose of blocking the ITC in exercise of power under Rule 86A of the Rules, then such action would definitely amount to malice in law.
8. Malice, in its legal sense, means such malice as may be assumed from the doing of a wrongful act intentionally but also without just cause or excuse or for want of reasonable or probable cause. Any use of discretionary power exercised for an unauthorized purpose amounts to malice in law. It is immaterial whether the authority acted in good faith or bad faith.
9. Rule 86A casts an obligation upon the authority concerned to form an opinion but is silent with regard to passing of any specific order assigning prima facie reasons for invoking Rule 86A.
10. To this extent, the Government needs to look into the matter and issue appropriate guidelines and also lay down some procedure to be followed for the exercise of power under Rule 86A of the Rules.
11. The power conferred upon the authority under Rule 86A of the Rules for blocking the ITC could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on subjective weighty grounds and reasons.
12. The power under Rule 86A of the Rules should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.
13. Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.
14. However, the court have not tested the Constitutional validity of Rule 86A as it was not challenged by writ applicants
Comments: Rule 86A could be said to be ultra vires, Article 300A of Constitution of India, ‘No person shall be deprived of his property save by the authority of law’. Input tax credit would be treated as a property of the taxpayer.