Parity Infotech Solutions Pvt. Ltd. Vs Government of National Capital Territory of Delhi & Ors. (Delhi High Court)
In the present case, the respondents had no material to form any opinion that the ITC had been availed wrongly on account of any fraud or any wilful-misstatement or suppression of facts to evade tax.
Concededly, the respondents had no material to form any independent opinion whatsoever. It is apparent that the impugned show cause notice was issued in a mechanical manner to comply with the impugned instructions.
In view of the above, we have no hesitation in holding that the impugned show cause notice is not in conformity with the provisions of Section 74 of the CGST Act and is, thus, without authority of law.
It is also apparent from a plain reading of the counter affidavit that the impugned show cause notice was issued only to overcome the provisions of Rule 86A(3) of the Rules, which expressly provide that any restriction under Section 86A will cease to have effect after the expiry of a period of one year from the date of imposition of such restriction. The petitioner’s ITC was blocked on 26.11.2020 and therefore, the order blocking the ITC had ceased to have any effect from 25.11.2021, on account of the passage of one year.
Notwithstanding that the restriction placed on the petitioner’s ITC had ceased; the respondents continued to illegally block the petitioner’s ITC solely because no other instructions had been received. It is also apparent that the respondents were fully aware that their action of continuing to block the petitioner’s ITC was contrary to Rule 86A of the Rules, however, the same did not deter them from continuing to block the ITC.
It is also apparent that respondent no.4 had proceeded to pass the impugned order not because it found that the petitioner had wrongly availed of the ITC by reason of a fraud or wilful-misstatement or suppression of facts to evade tax, but solely to deprive the petitioner from utilising the ITC, which could no longer be kept blocked by virtue of Rule 86A(3) of the Rules.
The petitioner has also assailed the impugned instructions. The impugned instructions indicate that the ITC amounting to ₹2037.31 crores in respect of 6414 registered taxpayers was blocked by Delhi State GST Officers, and is lying blocked for a period exceeding one year. The said Circular also records that GSTN is contemplating introducing a functionality for automatically unblocking such ITCs in view of Rule 86(3) of the Rules. In the aforesaid context, the Department of Trade and Tax had emphasized the need for the proper officers to take immediate steps to finalise investigations and proceedings, in all these cases. And, subsequent to the same, either utilise the blocked credit against the demands issued or unblock the ITC if, during investigation/proceedings, it is found that the conditions for blocking the ITC no longer exist.
The directive to issue a show cause notice proposing to create a demand by disallowing the ITC and thereafter, creating a demand cannot be read in isolation and in disregard of the provisions of the Act and the Rules. If the impugned instructions are understood to mean that a show cause notice be issued mechanically and a demand be created to appropriate the blocked ITC, the same would be contrary to law. A show cause notice can be issued only if the conditions under Section 74 of the CGST Act are satisfied. In case relating to ITC, the show cause notice can be issued only if the proper officer believes that ITC has been “wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax”. No show cause notice can be issued without the proper officer forming at least a prima facie view that the tax has not been paid or short paid or erroneously refunded or the ITC had been wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts.
Concededly, in the present case, respondent no.4 had no particulars as to the transaction in respect of which the ITC was blocked. He had no material whatsoever to come to the conclusion that the petitioner had wrongly availed or utilized the ITC by reason of fraud, wilful-misstatement or suppression of facts to evade tax. The respondents had blocked the petitioner’s ITC solely on the directions issued by the Joint Commissioner, GST West Commissionerate, Central Tax.
It is also clear from a plain reading of the impugned instructions that it suggests that the exercise of issuing a show cause notice and creating a demand should be completed before unblocking the ITC notwithstanding that the period of one year has elapsed after the blocking of the ITC. This is contrary to the express provisions of Rule 86A(3) of the Rules. It is apparent that the impugned instructions, to the aforesaid extent, has been issued only to overcome the provisions of Rule 86A(3) of the Rules and the impugned instructions, to this extent, cannot be sustained.
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