Electronic credit ledger cannot be blocked without providing an opportunity of personal hearing

Vinayak Metal and Chemicals Vs State of Jharkhand (Jharkhand High Court)

The Hon’ble Jharkhand High Court in M/s Vinayak Metal and Chemicals & Ors. v. the State of Jharkhand & Ors. [W.P.(T) No. 3022 of 2020 dated November 14, 2022] quashed and set aside the orders blocking Electronic Credit Ledger (“ECL”) of the assessee without providing an opportunity of personal hearing.  Permitted the assessee to file a revised Form GST TRAN-1, and further directed the Revenue Department that, in case the assessee fails to file a revised Form GST TRAN-1, it can initiate fresh proceeding after issuance of a proper Show Cause Notice (“SCN”) in accordance with law.

Facts:

M/s Vinayak Metal and Chemicals (“the Petitioner”) is engaged in trading of Iron & Steel, Coal and Salt and was registered dealers under the Value Added Tax (“VAT”). The Petitioner furnished its Returns for the period from April, 2017 to June, 2017 and declared an amount of INR 84,16,555.73/- as excess Input Tax Credit (“ITC”) to be carried forward to the Goods and Services Tax (“GST”) regime. Subsequently, the Petitioner submitted its Form GST TRAN-1 for claiming the ITC to be carry forward to GST regime. However, the Petitioner made a mistake and claimed transactional ITC for an amount of INR 69,16,555.73/-, in addition, the Petitioner claimed an amount of INR 15,41,522/- as input towards goods held in stock.

Consequently, the Petitioner requested to revise its Form GST TRAN-1, but the same was not allowed and a Summary SCN was issued (“the Impugned Summary SCN”) in terms of Form GST DRC-01 read with Rule 142 (1) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”) informing the Petitioner about initiation of proceedings for utilization of excess ITC. However, without providing any information to the Petitioner, an amount of INR 16,36,000/- was blocked from the ECL on May 4, 2018 and a Summary Order under GST DRC-07 (“the Impugned Order”), exercising power under Rule 142 (5) of the CGST Rules was issued without making available the copy of the Impugned Order to the Petitioner.

The Petitioner raised an objection for the same on March 16, 2020 concerning less ITC claimed and blocking of ITC, on which, the Revenue Department (‘the Respondent”) stated that the ITC was blocked in terms of Rule 86A of the CGST Rules and the alternative remedy of appeal is available under Section 107(1) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”).

Being aggrieved, this petition has been filed by the Petitioner in relation to non-compliance of the statutory provision relating to service of SCN in terms of Form GST DRC-01 before blocking /debiting of the ECL of the Petitioner.

Issue:

Whether the blocking of ECL of the Petitioner is violating the principles of natural justice?

Held:

The Hon’ble Jharkhand High Court in W.P.(T) No. 3022 of 2020 held as under:

• Noted that, no SCN was issued to the Petitioner except the Impugned Summary SCN which is not in accordance with the provision of the CGST Act. Further, the Petitioner was not granted personal hearing and therefore, have been denied principle of natural justice.
• Relied on the judgment of the Hon’ble Supreme Court in Union of India & Anr. v. FILCO Trade Centre Pvt. Ltd. & Anr. [Special Leave to Appeal (C) No(s). 32709-32710/2018, dated July 22, 2022 & September 02, 2022], wherein the Revenue Department was directed to open common portal for two months which was extended till November 30, 2022 to allow the assessee to file revise forms with respect to the Transitional credit.
• Stated that, liberty has been granted to all taxpayers irrespective of the fact whether the taxpayer has filed the writ application before the High Court or its case was decided by the Information Technology Grievance Redressal Committee.
• Quashed and set aside the Impugned Summary SCN, the Impugned Order and all consequential orders.
• Directed that, the Petitioner shall revise its Form GST TRAN-1 for claiming the short claimed ITC till November 30, 2022.
• Held that, the Petitioner is entitled to revise its Form GST TRAN-1 for claiming the short claimed ITC or where any excess ITC was claimed by the Petitioner as per the Respondent.
• Observed that, the guidelines has been issued vide Circular No.182/14/2022-GST dated November 10, 2022 for verifying the Transitional Credit.
• Further held that, the Respondent is required to abide by it and proceed in accordance with law after proper scrutiny of the revised Form GST TRAN-1 filed by the Petitioner.
• Permitted the Respondent to initiate fresh proceeding after issuance of a proper SCN in accordance with law, in case the revised Form GST TRAN-1 is not filed by the Petitioner.

Relevant Provisions:

Rule 86A of the CGST Rules:

“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.”

Rule 142 of the CGST Rules:

“Notice and order for demand of amounts payable under the Act

(1) The proper officer shall serve, along with the—

(a) notice issued under section 52 or section 73 or section 74 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130, a summary thereof electronically in FORM GST DRC-01;

(b) statement under sub-section (3) of section 73 or sub-section (3) of section 74, a summary thereof electronically in FORM GST DRC-02, specifying therein the details of the amount payable.

(1A) The proper officer may], before service of notice to the person chargeable with tax, interest and penalty, under sub-section (1) of section 73 or sub-section (1) of section 74, as the case may be, communicate the details of any tax, interest and penalty as ascertained by the said officer, in Part A of FORM GST DRC-01A.

(2) Where, before the service of notice or statement, the person chargeable with tax makes payment of the tax and interest in accordance with the provisions of sub-section (5) of section 73 or, as the case may be, tax, interest and penalty in accordance with the provisions of sub-section (5) of section 74, or where any person makes payment of tax, interest, penalty or any other amount due in accordance with the provisions of the Act , whether on his own ascertainment or, as communicated by the proper officer under sub-rule (1A), he shall inform the proper officer of such payment in FORM GST DRC-03 and the proper officer shall issue an acknowledgement, accepting the payment made by the said person in FORM GST DRC-04.

(2A) Where the person referred to in sub-rule (1A) has made partial payment of the amount communicated to him or desires to file any submissions against the proposed liability, he may make such submission in Part B of FORM GST DRC-01A.

(3) Where the person chargeable with tax makes payment of tax and interest under sub-section (8) of section 73 or, as the case may be, tax, interest and penalty under sub-section (8) of section 74 within thirty days of the service of a notice under sub-rule (1), or where the person concerned makes payment of the amount referred to in sub-section (1) of section 129 within seven days of the notice issued under sub-section (3) of Section 129 but before the issuance of order under the said sub-section (3), he shall intimate the proper officer of such payment in FORM GST DRC-03 and the proper officer shall issue an order in FORM GST DRC-05 concluding the proceedings in respect of the said notice.

(4) The representation referred to in sub-section (9) of section 73 or sub-section (9) of section 74 or sub-section (3) of section 76 or the reply to any notice issued under any section whose summary has been uploaded electronically in FORM GST DRC-01 under sub-rule (1) shall be furnished in FORM GST DRC-06.

(5) A summary of the order issued under section 52 or section 62 or section 63 or section 64 or section 73 or section 74 or section 75 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130 shall be uploaded electronically in FORM GST DRC-07, specifying therein the amount of tax, interest and penalty, as the case may be, payable by the person concerned.

(6) The order referred to in sub-rule (5) shall be treated as the notice for recovery.

(7) Where a rectification of the order has been passed in accordance with the provisions of section 161 or where an order uploaded on the system has been withdrawn, a summary of the rectification order or of the withdrawal order shall be uploaded electronically by the proper officer in FORM GST DRC-08.”

FULL TEXT OF THE JUDGMENT/ORDER OF JHARKHAND  HIGH COURT

Heard learned counsel for the parties.

2. Since in all these writ applications common issue is involved; as such all are being heard together and disposed of by this common order.

3. The petitioners in all these writ applications have challenged the respective summary notices in terms of GST DRC-01 read with Rule 142 of the JGST Rules, and summary orders in Form DRC-07 respective adjudication orders and all consequential orders and also the entire adjudication proceedings and further for a direction upon the respondents to unblocked/re-credit the amount of Input Tax Credit illegally blocked / debited from the Electronic Credit Ledger of the petitioners.

4. The brief facts as emerges by going through the documents/averments made in all these writ applications, it appears that the petitioners are business concern, engaged in trading of Iron & Steel, Coal and Salt and for the purpose of aforesaid, since they were registered dealers under the Value Added Tax have migrated from VAT Regime to GST Regime. Since the issue is common in the aforesaid writ applications as such for brevity the facts as enumerated in W.P.(S) 3022 of 2020, Ms. Vinayak Metal and Chemicals is enumerated here in below:

For the period from April, 2017 to June, 2017 the petitioner furnished its Returns under FORM JVAT 200 and declared an amount of Rs.84,16,555.73/- as excess Input Tax Credit to be carried forward to the next period (GST Regime). On 01.07.2017, GST Act was made applicable across the nation and in terms of Section 139 of the Act, the petitioner migrated from VAT Act to GST Act. On 31.10.2017, the petitioner submitted its TRAN-1 for claiming Input Tax Credit to be carried over to GST Regime. Although, the excess Input available to the petitioner was Rs.84,16,555.73/, but owing to an inadvertent mistake, the petitioner claimed transactional ITC for an amount of Rs.69,16,555.73/-. In addition, the petitioner claimed an amount of Rs.15,41,522/- as input towards Goods held in stock. Having learnt the mistake, the petitioner requested to revise its TRAN-1, but the same was not allowed. A Summary Show Cause Notice in terms of GST DRC-01 read with Rule 142 (1) was purportedly issued, informing about initiation of proceedings for utilization of excess ITC (the said notice was neither electronically uploaded nor physically made over to the petitioner). On 04.05.2018,without any knowledge or information to the petitioner, an amount of Rs.1 6,36,000/- was blocked from the Electronic Credit Ledger of the petitioner. On 04.05.2018 Summary Order under GST DRC-07, exercising power under Rule 142 (5) was issued without making available the copy of the order to the petitioner till date. On 16.03.2020 having realized that the Electronic Credit Ledger of the petitioner was blocked, the petitioner raised an objection concerning less ITC claimed and blocking of ITC including issuance of DRC-07.

A detailed Chart is given here in below which will reflect the tax period as well as date of issuance of DRC-01, DRC-07, date of blocking / debiting of ECL, recovery notice etc.in case of the petitioners’.

5. Counter affidavits has been filed by the respondents department in respective writ applications wherein common stand has been taken that the alternative remedy of appeal is available under Section 107(1) of the GST Act. Since no documents were made available even though DRC-01 was uploaded, hence, final order was passed. The ITC was blocked in terms of Rule 86A which has been inserted in the Rules from December, 2019.

A rejoinder has also been filed by the petitioners in reply of the respective counter affidavits wherein it is indicated that no adjudication in terms of Sections 73 & 74 has ever been carried out, which is in violation of principles of natural justice. Even the notice under DRC-01 was also not issued as would be evident from Annexure-10. The information about the blocking/debiting of Electronic Credit Ledger was also not informed to the respective petitioners.

Thereafter, a reply has been filed by the respondents to the rejoinder of the petitioners indicating therein that the show cause notice under Rule 142 (1) was issued to the petitioners by email and the petitioners appeared and produced the purchase invoices. The petitioner in W.P.(T) No.3022 of 2020 was directed to appear on 17.01.2018. On 04.05.201 8, Order under Section 73 (9) was passed against the petitioner and DRC-07 under Rule 142 (5) was issued and Electronic Credit Ledger was blocked. DRC-07 was uploaded on the GSTN Portal.

Thereafter, supplementary rejoinder of the petitioners to the reply filed on behalf of the respondents have also been filed disputing the claim of the respondents.

6. Learned counsel for the petitioners submits that the plea in all these writ applications is in relation to non-compliance of the statutory provision relating to service of show cause notice in terms of GST DRC­01 before blocking /debiting of the electronic credit ledger of the petitioner companies. He contends that in all these writ petitions the proceeding under Section 73 of the JGST Act has been initiated without issuance of proper show-cause notice under Section 73(1) of the Act. Instead, summary of show cause notice was issued in DRC-01 which the petitioners contend, was never served upon them. The proceedings has led to issuance of summary of the order in DRC-07 in the individual writ petitions which are therefore vitiated in law being in teeth of judgment rendered by this Court in the case of NKAS Services Pvt. Ltd. Vrs. State of Jharkhand & Ors. [W.P(T) No.2659 of 2021] dated 09.02.2022. They are also in teeth of the decision as rendered in the case of M/s Unity infraproject Ltd. Vrs. State of Jharkhand & Ors. [W.P.(T) No.985 of 2022] judgment dated 7^th July 2022 on failure to give at least three opportunities including personal hearing before passing the adjudication order which adversely effects the petitioners.

Learned counsel further submits that in all these cases the issue involved is common, so far as the transition of existing ITC under VAT to GST regime is concerned. The petitioners had, in all these writ petitions, rightly availed the transitional credit of ITC through TRAN-1 but the Department had initiated the proceedings on the charge that they have wrongfully availed part of it.

7. Learned counsel for the petitioners lastly relies upon the decision of the Hon’ble Apex Court in the case of Union of India & Anr. v. FILCO Trade Centre Pvt. Ltd. & Anr. dated 22^nd July 2022 under which any aggrieved assessee has been allowed a window period to file TRAN-1 or TRAN-II or revise the already filed form for availing transitional credit irrespective of whether the taxpayer had filed writ petition before the High Court or his case was decided by the Information Technology Grievance Redressal Committee. By the subsequent order the revised period has been modified and extended up to 30^th November 2022. However, he submits that unless the impugned adjudication orders are set aside, the petitioners may not be able to avail of the liberty granted by the Hon’ble Apex Court and file revised TRAN-1 within the window period.

8. Having heard learned counsel for the parties and after going through the documents annexed with the respective affidavits and the averments made therein, it is clear that the petitionershave challenged the impugned notices/orders and action of the respondent authorities on the ground of non-compliance of statutory provision as mentioned in Jharkhand Goods and Services Tax Act, 2017 (in short JGST).Admittedly,no proper show-cause noticeshave been issued to the respective petitioners except a summary of SCN in GST DRC-01which are not in accordance with the provision of the JGST Act and to that extent these casesare covered by the judgment passed by this Court in the case of NKAS Services Pvt. Ltd. Vrs. State of Jharkhand & Ors.(W.P.T 2659/2021).

It further transpires from the record of all these writ applications that in none of the case personal hearing has been granted to the petitioners. In the case of Unity Infraprojects Ltd. Vs. State of Jharkhand Ors.(W.P.T No.985/2022) this Court has categorically held that “It is evident that in terms of Section 75(4) & (5) in case an adverse order is to be passed against the assessee, the assessee is to be granted three opportunities to furnish reply, if the time is sought for. In the absence of proper show cause notice for furnishing reply petitioner was prevented from taking his defence and submitting a proper reply to the show cause notice. The adjudication order has been passed straightaway without following due procedure prescribed under Section 73 read with section 75(4) & (5) of the JGST Act. The aforesaid infirmities have vitiated the adjudication proceeding.”

9. Thus, it appears that admittedly, the petitioners in the respective applications have been denied of principle of natural justice. In view of the aforesaid discussion, the show cause notices in terms of GST DRC-01 read with Rule 142 of the JGST Rules, summary of orders in Form DRC­07 and respective adjudication orders and all consequential orders, are hereby, quashed and set aide.

10. Even otherwise, recently the Hon’ble Apex Court in the matter of FI LCO Trade Centre Pvt. Ltd. (supra) vide order dated 22.07.2022 has passed directions to the Goods and Service Tax network for opening the common portal for 2 months i.e. with effect from 01.09.2022 to 31 .10.2022, for filing concerned forms for availing transitional credit, as also, to revise the already filed forms.

In view of the above judgment, the petitioners in the present cases shall also be entitled to revise its GST TRAN-1 form for claiming the short claimed input tax credit, as also, to revise its form if any excess input tax credit was claimed by the petitioners as per the department. In that eventuality petitioners still have opportunity to file its revised TRAN-1 form during the window period fixed by the Apex Court in FI LCO Trade Centre Pvt. Ltd. (supra)

By the judgment rendered in the case of FILCO Trade Centre Pvt. Ltd. (supra), the respondent department was directed to open common portal for two months with effect from 01.09.2022 to 31.10.2022, which has been further extended till 30.11.2022, The petitioners herein are at liberty to file the revise TRAN-1 or TRAN-II.

By the aforesaid order of Hon’ble Apex Court, liberty has been granted to all taxpayers irrespective of the fact whether the taxpayer has filed the writ application before the High Court or his case was decided by the Information Technology Grievance Redressal Committee. Thus, since the period for filing TRAN-1/TRAN-2 is extended by 30.11.2022, as such the petitioners can avail the facility before the expiry of said period.

11. At this stage it is pertinent to mention here that even the Ministry of Finance vide its Circular No.182/14/2022-GST dated 10.11.2022 has issued guidelines for verifying the Transitional Credit in light of the order of the Hon’ble Supreme Court. As such the respondents are required to abide by the said direction and proceed in accordance with law after proper scrutiny of the revised TRAN-1, if any filed by the individual petitioner. In case any of the petitioner fails to file its revised TRAN-1 during this window period, the respondent may initiate fresh proceeding after issuance of a proper SCN in accordance with law.

12. As a result, all these writ applications are allowed in the manner and to the extent indicated hereinabove.

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(Author can be reached at info@a2ztaxcorp.com)