Blocking of ITC Under Rule 86A of CGST Rules: Power of Authority Are Neither Unfettered Nor Unbridled
In order to run the society smoothly the business is required to run seamlessly. Any adventurism in the sphere of business is bizarre and the same without discipline is not advisable. In all fiscal statutes, a delicate balance is to be maintained in respect of uninterrupted business activities and recovery of tax. It is well known to our legislature that recovery of tax to the fullest is only possible when trade is permitted to grow in a fearless environment. The advent of CGST Act & Rules has brought a new legislation in the area of indirect taxation. The Rules embodies certain provisions with an aim to protect the interest of revenue and for achieving such aim, it empowers the proper officer for provisional attachment which includes blocking of ITC temporarily. Though this power has been given with the sole purpose to protect the interest of revenue but sometimes the same is used by super enthusiastic officers of revenue blatantly with utter disregard to the established procedures. Such misuse of power has recently prompted the Hon’ble Supreme Court to comment that “provisions of blocking of ITC under GST are draconian in nature and cannot be used at the drop of a hat.” This article try to measure ambit and scope of Rule 86 A of the CGST Rules 2017.
ANALYSIS OF RULE 86A OF THE CGST RULES:
The RULE 86A OF THE CGST RULES read as under:
[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-
i. 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
ii. 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.
The aforesaid rule was inserted through an amendment w.e.f 26.12.2019. It is pertinent to note that, firstly, the aforesaid amendment which brought RULE 86A into existence is not retrospective, meaning thereby, it has no authority to be used against any transaction which occurred before 26.12.2019. This implies that any blocking of the ITC for a period prior to 26.12.2019 does not have any statutory backing and is, therefore, contrary to law.
Secondly, the commissioner or any officer authorised by him must form “reasons to believe” that the credit has been availed fraudulently or is ineligible for the reason mentioned in sub clause 1 of the RULE 86 A, i.e., the reasons mentioned maybe such as ITC supplier is non existent or not conducting business from registered premises or has supplied only goods-less invoice etc.
REASON TO BELIEVE MUST BE BASED ON TANGIBLE EVIDENCE: The formation of reason to believe is not an empty formality and it has to be based on concrete evidence considering the consequences of blocking ITC. The Hon’ble High Court of Gujarat while considering a petition in the case of M/s S.S. Industries Vs. Union of India [C/SCA/8841/2020] has held as here under:
The Hon’ble High Court of Gujarat further in the matter of Vimal Yashwant Giri Goswami Vs. State of Gujarat has held as follow:
“The Commissioner while recording his reasons to believe that a person has committed any offence has only to form a prima facie opinion based on cogent materials and credible information. The words “reason to believe” contemplate an objective determination based on intelligence, care and deliberation involving judicial review as distinguished from a purely subjective consideration and hence he is not required to conclude that the person sought to be arrested is guilty of any offence”.
Before taking any coercive step, the legislature has protected the business world by deliberately inserting the words “reason to believe”. As stated above, the reason to believe has to be formed on the basis of strong evidence against the business and that too for taking a step in order to protect interest of revenue and not otherwise. The ITC available is an earned credit for the business and the blocking of the same should be an exceptional occasion based upon tangible evidence against the business. The power of blocking of ITC under RULE 86 A is basically a provisional attachment to protect the interest of revenue, but this power has to be used cautiously based upon concrete evidence. The power given in Rule 86 A for blocking of ITC is nothing but a provisional attachment akin to Section 83 of the CGST Act. The courts in India have raised precautionary notes regarding provisional attachment under Section 83 of the CGST Act in a long line of judgments.
BUYER HAS NO CONTROL FOR THE PAYMENT OF TAX BY SUPPLIER: The ITC can even be denied under Rule 86 A if the tax is not paid by the person issuing the Tax Invoice. Apart from other things, which are the matter of academic debate, the most arbitrary aspect of this rule is to deny the credit when the tax is not paid by the supplier of goods or services. A buyer of the goods and services has no control over the taxation activity of the supplier. It is onerous to expect from the purchaser, who has fulfilled his part of obligation by paying the price of goods and taxes, to check whether the tax amount has been paid by the supplier or not. It is a business of revenue and onus cannot be shifted to the purchaser of ITC as it amounts to asking to perform an impossible act and it violates the principle of “lex non cogit ad impossibilia”, which states that impossibility cannot be asked to be performed.
The moment tax has been paid and goods have been received with invoice the business is entitled to avail the ITC and the same cannot be denied even if the seller has not paid the tax to the government. In the earlier regime of indirect tax, this issue has been settled in following pronouncements;
(i) S.K. Foils Ltd. Vs. CCE, Rohtak [2015 (315) ELT 258 (Tri. Del.]
(ii) Commissioner of Central Excise & Service Tax Vs. Juhi Alloys Ltd. [2014 (302) ELT 487 (All.)]
(iii) Commissioner of Central Excise & Service Tax Vs. Juhi Alloys Ltd. [2014 (302) ELT 487 (All.)]
In fact, the Hon’ble Jharkhand High Court has settled the above ratio in TATA MOTORS (supra) and held as under:
– “once a buyer of input receives invoices of excisable items, unless factually it is established to the contrary, it will be presumed that when payments have been made in respect of those inputs on the basis of invoices, the buyer is entitled to assume that the excise duty has been/ will be paid by the supplier on the excisable inputs. The buyer will be therefore entitled to claim Modvat credit on the said assumption. It would be most unreasonable and unrealistic to expect the buyer of such inputs to go and verify the accounts of the supplier or to find out from the department of the central excise whether actually duty has been paid on the inputs by the supplier. No business can be carried out like this, and the law does not expect the impossible.”
Dealing with the similar provision under the Delhi VAT Act, the Hon’ble High Court of Delhi has ruled in consonance of the above settled law and reliance can be placed on:
(i) Shanti Kiran India Private Limited v. Commissioner of Trade and Taxes [(2013) 57 VST 405 (Del.)]
(ii) Approving the Shanti Kiran (supra), the Hon’ble Delhi Court distinguished bonafide purchaser and fraudulent purchaser and further held in Onquest Merchandising India Private Limited v. Govt. of NCT [(2018) 56 GSTR 177 (Del.)] to the effect that section 9(2)(g) of the Delhi VAT Act denies, to a bona fide purchaser, the benefit of the ITC only because of the default of the selling dealer over whom such purchasing dealer has not control. This measure qua the purchasing dealer is arbitrary, irrational and unduly harsh and, therefore, violative of article 14 of the Constitution. Reliance has also been placed on the decision in the matter of Commissioner of Customs, Amritsar v. Parker Industries  207 ELT 658 (P&H).
NOT AS A RECOVERY TOOL: The blocking of ITC has a serious ramification as it affects the flow of credit for which business is legitimately entitled. The provision has been inserted with a sole view to protect the interest of revenue where it appears that if the same is not blocked the business and the credit involved will vanish immediately. It is meant for “fly by night operators” and certainly not for a legitimately running business. It has come to notice that the authorities are invoking this provision in the name of so called investigation with scant disregard to the procedures established under law. The Hon’ble apex court in M/s Radha Krishan Industries vs. State of Himachal Pradesh & Ors. (Civil Appeal no 1155 of 2021) was compelled to observe that the provisions for provisional attachment under the CGST RULES are draconian in nature and authorities can not be permitted to block the ITC of a business without due procedures.
M/s Radha Krishan Industries (supra) has settled the issue in hand and Hon’ble apex court while deciding the matter has ruled that provisional attachment of the property has to be done only when the same is “necessary so for the protecting interest of revenue”. The relevant extracts of this judgment are as follows:
(i) The power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled;
(ii) The exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary to do so for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment the Commissioner must form an opinion on the basis of tangible material that the assessee is likely to defeat the demand, if any, and that therefore, it is necessary to do so for the purpose of protecting the interest of the government revenue.
(iii) The expression “necessary so to do for protecting the government revenue” implicates that the interests of the government revenue cannot be protected without ordering a provisional attachment;
(iv) The formation of an opinion by the Commissioner under Section 83(1) must be based on tangible material bearing on the necessity of ordering a provisional attachment for the purpose of protecting the interest of the government revenue;
(v) Under the provisions of Rule 159(5), the person whose property is attached is entitled to dual procedural safeguards:
(a) An entitlement to submit objections on the ground that the property was or is not liable to attachment; and
(b) An opportunity of being heard;
(vi) The Commissioner is duty bound to deal with the objections to the attachment by passing a reasoned order which must be communicated to the taxable person whose property is attached;
(vii) A final order having been passed under Section 74(9), the proceedings under Section 74 are no longer pending as a result of which the provisional attachment must come to an end; and
(viii) The appellant having filed an appeal against the order under section 74(9), the provisions of sub-Sections 6 and 7 of Section 107 will come into operation in regard to the payment of the tax and stay on the recovery of the balance as stipulated in those provisions, pending the disposal of the appeal.
CONCLUSION: As the issue under present consideration has already been settled by the Hon’ble Supreme Court, the author expects that revenue authorities will stop twisting the arms of the business and will stop using the impugned provision of provisional attachments for sake of recovery. For the purpose of recovery of the dues, the legislature has prescribed the procedures under the CGST Act and the rules thereunder and the same should be adhered instead of adopting any shortcut in an illegal manner as doing so would be detrimental for the business.