Hearing Opportunity Mandatory After ECL Blocking Under Rule 86A: Karnataka HC

K-9-Enterprises Vs State Of Karnataka (Karnataka High Court)

In the case of K-9 Enterprises Vs State of Karnataka, the Karnataka High Court examined the validity of orders issued under Rule 86A of the Central Goods and Services Tax (CGST) Rules, 2017. The petitioners challenged the blocking of their Input Tax Credit (ITC) in the electronic credit ledger without prior notice or an opportunity to be heard. They argued that such actions violated principles of natural justice and constitutional rights under Articles 14 and 19(1)(g). The petitioners maintained that their transactions were legitimate and that they should not be penalized for potential fraud by their suppliers.

The respondents contended that Rule 86A allows for preventive measures based on credible information to safeguard revenue interests. They argued that ITC is a concession, not a vested right, and blocking ITC is temporary, pending investigation. After reviewing the case, the Court ruled that while preventive action is permissible, principles of natural justice must be upheld. It directed the authorities to provide a post-decisional hearing to the petitioners, allowing them to present objections and supporting documents. The authorities were instructed to issue a reasoned order within a stipulated time, ensuring compliance with Rule 86A and the CGST Act provisions. The case underscores the balance between revenue protection and taxpayers’ rights.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

1.  The petitioners in these writ petitions have assailed the orders passed by respondent no.2 blocking their Input Tax Credit (ITC) available in their Electronic Credit Ledger by exercising the powers under Rule 86A of the Central Goods and Services Tax Rules, 2017 (for short, ‘the Rules of 2017’).

2. The petitioners claim that they are registered under the Karnataka Goods and Services Tax Act, 2017 (for short, ‘the Act of 2017’) and they are dealing with lead, lead scrap and other ancillary business related to lead and lead scrap. According to the petitioners, they have been purchasing the goods from the customers/dealers registered under the Act of 2017 and have been complying with the necessary Rules and Regulations governing the business under the GST Regime. The petitioners claim that they have purchased goods from the persons who are registered under the Act of 2017 and there is no fraud played by the petitioners in the transaction and without even affording an opportunity of hearing, respondent no.2 has abruptly issued the impugned orders blocking the ITC available in their electronic credit ledger. Being aggrieved by the same, the petitioners are before this Court.

3. Learned Counsel for the petitioners submits that the impugned orders have been issued in violation of the principles of natural justice. He submits that the act of respondent no.2 is violative of the rights guaranteed to the petitioners under Articles 14 & 19(1)(g) of the Constitution of India. He submits that even if the persons from whom the petitioners have purchased the goods are assumed to be fraudulent, the petitioners cannot be punished for the same unless it is proved that the petitioners have played a role in the fraud. He submits that the act of the respondents amount to negative blocking of the ITC and such a power is not provided under the Statute. In support of his arguments, learned Counsel has placed reliance on the following decisions:

(i) Samay Alloys India Pvt. Ltd. vs State of Gujarat – 2022 ILR Online Gujarat 1080;

(ii) S. Industries vs Union of India – AIR Online 2020 Guj 2077;

(iii) M/s. New Nalbandh Traders vs State of Gujarat – AIR Online 2022 Guj 764;

(iv) Dee Vee Projects Ltd., a Public Limited Company, Through Its Director Sumit Rajan Das s/o Bikash Ranjan Das vs Government of Maharashtra, Department of Goods and Services Tax, Through Office of the Deputy Commissioner State Tax (E-006), Nagpur Division, Through Its Commissioner and Others – 2022 SCC OnLine Bom 304;

(v) North End Food Marketing Pvt. Ltd. vs State of U.P. & Others – 2021 SCC OnLine All 587;

(vi) Judgment of the Division Bench of High Court of Punjab & Haryana in the case of Rajnandini Metal Ltd. vs Union of India & Others in CWP No. 26661/2021 disposed of on 31.05.2022.

4. Per contra, learned Additional Government Advocate appearing for the respondents submits that respondent no.2 has passed the impugned orders based on the field reports by the Assistant State Tax Officer, Vasco-D-Gama, Goa, which are referred to in the impugned orders. He submits that the intent and purport of Rule 86A of the Rules of 2017 is to secure the interest of the Revenue and it is a preventive measure which is taken on the basis of credible information. He submits that neither the Act of 2017 nor the Rules of 2017 require the respondents to follow the principles of natural justice before taking action under Rule 86A of the Rules of 2017. He also submits that the petitioners cannot claim a vested right on the ITC and it is only a concession given to the petitioners which they are required to utilize legally. He submits that the petitioners are not prevented from carrying on their business activities and all that has been done is to prevent them from operating the electronic credit ledger. The petitioners are free to carry on their business by effecting payment of the requisite amount of tax into their account, and what has been prevented is that the petitioners would not be entitled to adjust the tax by availing the credit available in their electronic credit ledger and blocking is only for a temporary period till the investigation is complete. In support of his arguments, he has placed reliance on the following judgments:

(i) Judgment of the High Court of Calcutta in the case of Basanta Kumar Shaw, Proprietor of M/s. N.M.D. Engineering Works vs The Assistant Commissioner of Revenue, Commercial Taxes and State Tax, Tamluk Charge & Others, disposed of on 28.07.2022 in MAT 976/2022 with CAN 1/2022;

(ii) Judgment of Allahabad High Court in the case of M/s. R.M. Dairy Products LLP vs State of U.P. & Three Others, disposed of on 15.07.2021 in Writ Tax No. 434/2021.

5.  Before adverting to the validity of the orders impugned in these writ petitions, in the background of the challenge made to the impugned orders, it may be necessary to mention what is an electronic credit ledger in the CGST and how the ITC is availed and utilized by the registered dealer. In this regard, it would be useful to refer to paragraphs 9 to 19 of the judgment in Samay Alloys India Pvt. Ltd.’s case supra, which gives a fair idea as to what is an electronic credit ledger in GST and how the ITC is availed and utilized by the registered dealer.

“9. Before we proceed to discuss the scope and applicability of Rule 86A, we must give a fair idea as to what is an electronic credit ledger in the GST. One of the benefits under the GST regime is that the payment of tax under the different heads is done online. To make the GST payment process convenient, each registered taxpayer gets two electronic ledgers. These ledgers include; (1) Electronic Liability Register and (2) Electronic Credit ledger. The electronic liability register reflects the cash available to settle the tax liability. Whereas, the Electronic liability ledger showcases the amount of tax payable by the taxpayer. Finally, the electronic credit ledger displays the input tax credit balance available to the registered taxpayer.

10. The taxpayer raises a challan in the form GST PMT – 06 to begin with the GST payment. This challan contains the details of the amount to be deposited towards the tax, interest, penalty, fees or any other amount and it is valid for a period of

15.  days. Thus, the taxpayer deposits the tax amount at the common portal after generating the Challan. Once this is done, the collecting bank generates the CIN (Challan Identification Number). This number is indicated on the GST Payment Receipt. Hence, the amount so deposited is credited to the electronic cash ledger of the taxpayer on whose behalf the payment was deposited. This happens only on receipt of the CIN.

11. Both the CGST and SGST are paid in equal proportions for the intra–state supplies. The IGST is paid for the inter – state supplies. The taxpayer’s monthly GST return reflects the amount of tax to be paid as well as the input tax credit (ITC) details. These ITC details are self assessed by the taxpayer via the monthly returns. Furthermore, these details get reflected in the electronic credit ledger. And the amount of ITC in the electronic credit ledger gets utilized as per the rules mentioned in section 49.

ITC Utilization

12. The ITC is utilized in the following sequence to set off the CGST liability:

(1) The ITC standing under the CGST is used to set off the CGST output liability.

(2) Then, the ITC standing under the IGST is used to set off the remaining CGST output liability.

13. Further, the ITC is utilized in the following sequence to set off the SGST liability:

(1) The ITC standing under the SGST is used to set off the SGST output liability.

(2) Then, the ITC standing under the IGST is used to set off the remaining SGST output liability.

14. Finally, the ITC is utilized in the following sequence to set off the IGST liability:

(1) The ITC standing under the IGST is used to set off the IGST output liability.

(2) The ITC standing under the CGST is used to set off the remaining IGST output liability.

15. Finally, the ITC standing under the SGST is used to set off the remaining IGST output liability.

16. Furthermore, no set off is available between the CGST and SGST.

17. Hence, from the above, it is clear how the electronic credit ledger is used while making the tax payment.

What is Electronic Credit Ledger in GST?

18. The electronic credit ledger reflects the amount of Input Tax Credit available to the taxpayer. Thus, every claim of input tax credit of the registered taxpayer eligible for claiming such a credit is credited to this ledger. The amount available in the electronic credit ledger is utilized in making payments towards the outward tax liability by the registered taxpayer.

19. The electronic credit ledger shall be maintained in the form GST PMT – 02. This form shall be maintained on the common portal for every registered person eligible to claim input tax credit under GST Act. Every claim of the input tax credit is credited to the electronic credit ledger.”

6. Rule 86A of the Rules of 2017 reads 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 non­existent 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.]” .

7. From a reading of the heading of Rule 86A of the Rules of 2017, it is clear that the said rule can be invoked only if the amount is available in the electronic credit ledger and not otherwise. The heading of the provision of law or the marginal note can be always relied upon to clear any doubt or ambiguity in interpretation of the provision to discern the legislative intent.

8. From a reading of Rule 86A of the Rules of 2017, it is seen that the first part of the Rule deals with the conditions that are required to be fulfilled in order to invoke the powers under the Rule, and the second part of the Rule provides for the consequences that would follow in case Rule 86A of the Rules of 2017 is invoked by the competent authority. As stated earlier, the foremost condition to enable the competent authority to invoke Rule 86A of the Rules of 2017 would be that credit of input tax should be available in the electronic credit ledger as on the date the competent authority decides to invoke Rule 86A of the Rules of 2017. Such credit which is available in the electronic credit ledger should be the result of fraudulent transactions. Unless the competent authority is fully satisfied that there is a prima facie case for invoking Rule 86A of the Rules of 2017, he cannot invoke Rule 86A, as the consequence/result of the same would be having a direct bearing not only on the business of the registered person, but also on his credentialities. In exercise of the powers under Rule 86A of the Rules of 2017, the competent authority is entitled to disallow the registered person from debiting the ITC available in the electronic credit ledger for a limited period, and therefore, it can be said that such action taken by the competent authority is on a provisional basis. The recovery of ITC following any order passed under Rule 86A of the Rules of 2017 would be governed by Sections 73 & 74 of the Act of 2017 and in the present case, the said stage has not yet reached.

9. The scope and applicability of Rule 86A of the Rules of 2017 has been considered by various High Courts of our country. In Samay Alloys India Pvt. Ltd.’s case supra, the Division Bench of Gujarat High Court at paragraphs 28 to 30 has observed as under:

“28. Rule 86A of the CGST Rules empowers the Commissioner or his subordinates to freeze the debit in the electronic credit ledger provided he has reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible. Thus, the condition precedent is that the input tax credit should be available in the electronic credit ledger before the power under Rule 86-A is invoked by the authority. In the case on hand, it is not in dispute that the amount of input tax credit available in the electronic credit ledger as on the date of blocking of ledger was Nil. If no input tax credit was available in the ledger, the blocking of electronic credit ledger under Rule 86-A of the Rules and insertion of negative balance in the ledger would be wholly without jurisdiction and illegal.

29. On a plain reading of the opening part of Rule 86A(1) of CGST Rules, 2017, it transpires that the power conferred under Rule 86A can be exercised by the Commissioner or an officer authorised by him (not below the rank of an Assistant Commissioner). Further the powers can be exercised if the following cumulative conditions are satisfied.

i) Credit of input tax should be available in the electronic credit ledger,

ii) The Commissioner of an officer authorised by him should have reason to believe that such credit has been fraudulently availed or is ineligible,

iii) The reason to believe are be recorded in writing.

30. In case the above referred conditions are satisfied, a proper officer can invoke Rule 86A. Upon invocation of Rule 86A, a proper officer can –

a) Disallow debit from the electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

b) Such restriction should be for an amount equivalent to the amount claimed to have been fraudulently availed or is ineligible.”

10. In S.S.Industries case supra, the Division Bench of Gujarat High Court at paragraph 65 has observed as under:

“65. Our final conclusions may be summarized as under:-

(I) The invocation of Rule 86A of the Rules for the purpose of blocking the input tax credit may be justified if the concerned authority or any other authority, empowered in law, is of the prima facie opinion based on some cogent materials that the ITC is sought to be availed based on fraudulent transactions like fake/bogus invoices etc. However, the subjective satisfaction should be based on some credible materials or information and also should be supported by supervening factor. It is not any and every material, howsoever vague and indefinite or distant remote or far-fetching, which would warrant the formation of the belief.

(II) 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.

(III) 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.

(IV) The aspect of availing the credit and utilization of credit are two different stages. The utilization of credit is a vested right. No vested right accrues before taking credit.

(V) The Government needs to apply its mind for the purpose of laying down some guidelines or procedure for the purpose of invoking Rule 86A of the Rules. In the absence of the same, Rule 86A could be misused and may have an irreversible and detrimental effect on the business of the person concerned. In this regard, the Government needs to act promptly.”

11. In M/s. New Nalbandh Traders case supra, the Division Bench of Gujarat High Court at paragraph 12 has observed as under:

“12. 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.”

12. The Division Bench of Punjab & Haryana High Court in Rajnandini Metal Ltd.’s case supra, in paragraph 11 has observed as under:

“11. The impugned order in the present case when tested on touchstone of the provision contained in Rule 86A and the law referred herein above, we find that the reason to invoke the power conferred under Rule 86A of CGST Rules against the petitioner is an intelligence report received from Principal Chief Commissioner, Central Excise and Central Tax, Vadodara Zone regarding a racket of firms indulging in fake judicial going-on a drastic far-reaching action under Rule 86A of the CGST Rules cannot be sustained. There is no reason recorded by the Authority for exercising power under Rule 86A of the CGST Act, 2017 which would show independent application of mind that can constitute reasons to believe which is sine qua non for exercising power under Rule 86A of the CGST Rules. It is trite law that a speaking order has to be self sustainable and respondents at this stage cannot be allowed to justify the same by adding reasons to it by filing additional affidavits. From the reading of the order, it is evident that it is bereft of any material or ‘reason to believe’ that the petitioner is guilty of fraudulent transaction or is ineligible under Section 16 of the CGST Act.”

13. From the aforesaid, it is evident that the powers under Rule 86A of the Rules of 2017 can be invoked or exercised by the competent authority only in the event he has reason to believe that the credit of input tax available in electronic credit ledger have been fraudulently availed or the assessee is ineligible for the same. The powers under Rule 86A of the Rules which are vested with the competent authority is subject to the satisfaction recorded by the said authority on he forming an opinion to the effect that the electronic credit ledger has been fraudulently availed or that the assessee is ineligible to avail the benefits of the same in situations where the Rule provides for the competent authority to invoke the same.

14. The impugned orders having been passed by respondent no.2 allegedly based on the field visit report by the Assistant State Tax Officer, Vasco-D-Gama, Goa, which has been referred to in the order impugned, it appears that based on the saidreport the competent authority has passed the impugned order. For ready reference, the impugned order passed by respondent no.2 is culled down and the same reads as under:

“In the present case, it is observed that the taxpayer namely, M/s. K9 Enterprises GSTIN: 29BAYPN2343EIZB has availed ITC from registered persons who has been found non­existent or not to be conducting any business from any place for which registration has been obtained in contravention of the above provisions. The details of input tax availed from these taxpayers is given below:

Therefore, in order to prevent wrongful utilization of availed ITC and to protect the interest of revenue, the following order is passed by the undersigned as below:

ORDER NO.22/2023-24 DATED 27.06.2023

As specified in preamble, the taxpayer M/s. K9 Enterprises GSTIN: 29BAYPN2343E1ZB has availed fraudulent or ineligible ITC availed from registered person/s who has been found non-existent or not to be conducting any business from any place for which registration has been obtained in contravention of the above provisions.

Therefore, it is hereby ordered to block the Input Tax Credit wrongly availed by the taxpayer as discussed in the preamble. Details are as under:

Hence, the total ITC Blocked is Rs.30,88,089/- (Rupees Thirty Lakhs Eighty Eight Thousand Eighty Nine only).”

15. In the impugned order, prior to the culled down portion, reference is made to the field visit report of the Assistant State Tax Officer, Vasco-D-Gama, Goa, and thereafter, in the preamble, Section 16(2) of the Act of 2017 and Rule 86A of the Rules of 2017 have been quoted, and thereafter, the aforesaid culled down portion of the order is found. On the overall reading of the impugned order, it appears that the competent authority has arrived at a conclusion on the basis of the field visit reports referred to in the impugned order, that the petitioners/assessees have availed ITC from the registered person who has been found non-existent or not to be conducting any business from any place, for which registration has been obtained by the said persons in contravention of the provision of the statute. The particulars of the input tax availed by such tax payer who is said to be not in existence are also given in the impugned order. The action of the respondents is being taken in the interest of the Revenue and it is only a preventive measure. The Court while considering the correctness of the said Act is entitled to examine whether there was any material available with the State Government and if such material is available, whether the reasons recorded in the formation of opinion are found in the order. If such reasons are found, the Court can also examine whether the reasons for formation of opinion have got a rational connection or bearing on the formation of such opinion by the competent authority. If the Court finds that the subjective satisfaction of the competent authority is not based on any credible information, then the act of the competent authority in blocking the ITC in exercise of its power under Rule 86A of the Rules of 2017 may not be sustainable.

16. The material on record would go to show that prima facie there is something which the Revenue has noticed, and therefore, an investigation is in progress and pending investigation, preventive measure has been taken by the competent authority to block the ITC account of the petitioners and this measure is a temporary one and Rule 86A of the Rules of 2017 itself provides that on expiry of the period of one year, the restriction imposed under the Rule shall seize to have the effect from the date of imposition of such restriction. The Division Bench of the High Court of Bombay in Dee Vee Projects Ltd.’s case supra, while answering the question whether Rule 86A of the Rules of 2017 permits blocking of electronic credit ledger, at paragraph 31 has observed as under:

“31. A careful perusal of the above referred provisions would show that there is no specific mention therein about the blocking of the ECL and what is stated is that the Competent Authority may not allow debit of an amount equivalent to an amount determined or found to be fraudulently or wrongly shown as credit available in the ECL for discharge of any liability under Section 49 or any equivalent refund of an unutilized amount of credit in the ECL. Disallowing debit of an amount to the ECL is nothing but blocking of the ECL. But, such blocking of the ECL cannot be for an amount which is more than the amount found to be fraudulently or wrongly availed of. The answer to the second question, therefore, is that rule 86-A of Rules, 2017 does permit dis-allowance of debit of an amount to the electronic credit ledger only to the extent of fraudulent or wrong availment of credit in the ECL and such disallowance can be done through blocking of the ECL to the extent of the amount fraudulently or wrongly shown as lying in credit in the ECL.”

17. The Bombay High Court in the aforesaid case principally held that, the competent authority before invoking the power under Rule 86A of the Rules of 2017, is required to satisfy himself that the two important pre-requisites of the Rule is fulfilled before the power of blocking the electronic credit ledger or before disallowing of debit of ITC found in the electronic credit ledger is exercised.

18. The first requisite of the Rule which is required to be considered by the competent authority is with regard to the basis of material available before he taking any action for blocking of electronic credit ledger. The second pre-requisite is of recording the reasons in writing for invoking the powers under Rule 86A of the Rules of 2017. Unless the aforesaid two pre-requisites are fulfilled, the competent authority cannotinvoke the powers under Rule 86A of the Rules of 2017 for the purpose of disallowing the debit of the determined amount to the electronic credit ledger or to block the electronic credit ledger even to the extent of amount fraudulently or wrongly availed by the petitioners/assessee.

19. Considering the necessity of fulfillment of the aforesaid two pre-requisites by the competent authority before exercising his power under Rule 86A, which is manifest by a bare reading of the said provision of law, the Division Bench of the Bombay High Court in Dee Vee Projects Ltd.’s case supra at pargraph 33 has observed as under:

“33. 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 ones fancies or whims or imagination. The power under rule 86-A is an administrative power with quasi-judicial hues exhibited in 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 utilize 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.”

20. If the impugned order which is assailed in these writ petitions is examined in the aforesaid background, it can be said that respondent no.2 before issuing the impugned order has arrived at a subjective satisfaction on the basis of the material available before him which he has referred to in the impugned order. The details of such material is not required to be provided or put forward by the competent authority at this stage as the investigation is still in progress. The said material is required to be considered only by the competent authority for his subjective satisfaction and if the court finds that such material are available on record, the first pre-requisite for invoking Rule 86A of the Rules of 2017 can be said to have been fulfilled.

21. In so far as the second pre-requisite of Rule 86A of the Rules is concerned which is of recording of reasons in writing, in the present case, the competent authority has observed that the petitioners/assessee have availed ITC from registered persons who are found to be not in existence or not conducting any business from any place and the registration obtained by them was in contravention of the provisions of the Statute. The details of the input tax availed by such tax payer is also given in the impugned order.

22. The Bombay High Court in Dee Vee Projects Ltd.’s case supra at paragraphs 36 to 38 has observed as under:

“36. 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.

37. 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.

38. 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. This is also the view taken in the case of M/s HEC India LLP Vs. Commissioner of GST and Central Excise Audit-II and another (WA No.2341 of 2021 dated 16.09.2021), which commends to us. Then, as stated earlier, a remedial hearing followed by confirmation or revocation of the order would be necessary.”

23. If the orders impugned in the present writ petitions are examined in the aforesaid background, the two basic pre­requisites for invoking Rule 86A of the Rules prima facie appears to have been fulfilled by respondent no.2. Considering the fact that the impugned orders have been issued based on the field visit report by the Assistant State Tax Officer of Goa, it cannot be said that respondent no.2 had no reason to believe the material made available to him. On the basis of such material, respondent no.2 has also observed that the petitioners/assessees have availed the ITC from fraudulent persons who are not in existence and not conducting any business and their registration itself was fraudulent. The particulars of input tax availed from such persons as found in the Electronic Credit Ledger is also furnished by respondent no.2 in the impugned orders and the ITC has been blocked only to the extent of the amount availed from those fraudulent persons/entities.

24. This Court, however, cannot ignore the fact that the power under Rule 86A of the Rules of 2017 is drastic in nature and in the event of the said power being exercised against an assessee, it disentitles him to avail of the credit in the electronic credit ledger for discharge of his tax liability which he is otherwise entitled to avail. Therefore, serious civil consequences will have to be faced by the assessee. The order passed under Rule 86A of the Rules of 2017 would act as an obstruction to the right of the assessee to utilize the credit available in his electronic credit ledger. In a given case, it may be subsequently found that the basis on which the Rule was invoked by the competent authority was followed or provided without holding a thorough investigation in the matter and in such an event, the assessee would be put to unnecessary hardship, serious civil consequences and also his credentialities would be at stake. When the impugned order is taken into consideration based on this context, the question that arises for consideration would be whether the power under Rule 86A of the Rules of 2017 can be exercised without complying the principles of natural justice.

25. The question whether the availment of ITC is a vested right, was considered by the Division Bench of Calcutta High Court in Basanta Kumar Shaw’s case supra and it has been held that the right conferred on the assessee is regulated by the provisions of the Act and it is a concession granted under the Statute and unless and until the assessee complies with all the conditions scrupulously, he would not be entitled to avail the ITC.

26. The High Court of Allahabad in M/s. R.M.Dairy Products case supra, appreciating the scope of Rule 86A of the Rules of 2017 has observed that the Rule does not contemplate any recovery of tax from an assessee and it only provide in certain situations and upon certain conditions being fulfilled, specified amount may be held back and be not allowed to be utilized by the assessee towards discharge of his/its liabilities on the outward tax or towards refund. It creates a lien without actual recovery being made or attempted. It is in this background in the said case, it has been held that Rule 86A of the Rules of 2017 is only a provision to secure the interest of the Revenue and not a recovery provision to be exercised upon fulfillment of conditions, and therefore, the Division Bench of Allahabad High Court held that there cannot be any violation of the principles of natural justice since the legislative enactment was being performed in a particular way as it was required to.

27. However, in the case of B.GAUTAM VS UNION OF INDIA & OTHERS – (1993)1 SCC 78, the Hon’ble Supreme Court has held that the mere fact that reasons were required to be recorded in writing and the same will not substitute an opportunity of being heard and even if the Statute does not stipulate such a requirement, opportunity of showing cause must be afforded by way of compliance with minimal requirement of natural justice where the provision involves adverse civil consequences.

28. In Dee Vee Projects Ltd.’s case supra, the High Court of Bombay at paragraph 35 has observed as under:

“35. 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 natureof 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.”

29. The power under Rule 86A of the Rules of 2017 is of an enabling kind and it is conferred on the competent authority to secure the interest of the Revenue. The said power is exercised by the competent authority on the basis of the material made available to him pending investigation, and therefore, as stated earlier, the order passed under Rule 86A of the Rules of 2017 is virtually provisional in nature. When an assessee who faces serious hardship and civil consequences as a result of the said orders, raises a plea that invoking of the drastic power under Rule 86A was unwarranted and the same was done without holding a proper enquiry and the action was initiated based on a report which is not sound and proper, it becomes imperative to hear the assessee on these aspects of the matter. It is in this background, I am inclined to follow the principle stated by the High Court of Bombay in Dee Vee Projects Ltd.’s case supra, wherein it is held that given the nature of power provided under Rule 86A though the statute does not provide for a personal hearing before passing any order under the said Rule, it has to be read into the provisions of the said Rule which is not expressly provided therein, so that a post-decisional or remedial hearing could be granted to the person/assessee affected by blocking of his electronic credit ledger.

30. Considering the scope, applicability and the manner of power exercised by the competent authority under Rule 86A of the Rules of 2017, it may not be feasible for the authority to have a normal pre-decisional hearing and since the nature of order passed under Rule 86A is provisional, it would be reasonable to consider granting a post-decision hearing to the petitioners which would comply with the principles of natural justice. Though post-decision hearing is not a substitute for pre-decisional hearing, in situations where pre-decisional hearing is likely to frustrate the interest and purpose of the Statute, the mechanism of post-decisional hearing will be the only alternative. The effect of the order under Rule 86A of the Rules of 2017 would be that the petitioners/assessees would not be entitled to avail the input tax credit available in their Electronic Credit Ledger for a temporary period and otherwise, the petitioners/assessees are free to carry on their business by effecting payment of the requisite amount of tax into their account. Therefore, even after orders are passed under Rule 86A of the Rules of 2017, the petitioners/assessees can carry on their business activities.

31. Learned AGA has submitted that pursuant to the impugned orders, steps have been taken for issuing show cause notices to the petitioners/assessee as provided under Sections 73 & 74 of the Act of 2017. Prior to any steps being taken for taking action under Sections 73 & 73 of the Act of 2017 against the petitioners which is the actual recovery of ITC from the assessee, I am of the view that post-decisional hearing is required to be given to the petitioners by respondentno.2/competent authority who shall hear the petitioners/assessees and pass a reasoned order, thereafter, either confirming or revoking the order impugned which is provisional in nature.

32. Under the circumstances, the writ petitions are disposed of directing respondent no.2 to afford an opportunity of post-decisional hearing to the petitioners, who shall be permitted to file their objections along with the relevant supporting documents/material and on consideration of the same, respondent no.2/competent authority shall pass a reasoned order in compliance of the requirement of Rule 86A of the Rules of 2017. For the said purpose, the petitioners are directed to appear before respondent no.2 on 03.08.2023 and within two weeks thereafter, respondent no.2/competent authority is directed to pass orders, and depending upon the outcome of such orders, if necessary, further action shall be taken against the petitioners as provided under Sections 73 & 74 of the Act of 2017.