New Nalbandh Traders Vs State of Gujarat (Gujarat High Court)
Rule 86A has two pre-requisites to be fulfilled before the power of disallowing of debit of suitable amount to the Electronic Credit Ledger or blocking of ECL to the extent of the amount fraudulently or wrongly availed of is exercised. The first pre-requisite is of the Competent Authority or the Commissioner having been satisfied on the basis of the material available before him that blocking of ECL for the afore-stated reasons is necessary. The second pre-requisite is of recording the reasons in writing for such an exercise of the power. From the language used in rule 86-A it becomes very clear that unless both these pre-requisites are fulfilled, the authority cannot disallow the debit of the determined amount to the ECL or cannot block the ECL even to the extent of amount found to be fraudulently or wrongly availed of.
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 one’s fancies or whims or imagination. The power under rule 86-A is an administrative power with quasi-judicial hues exhibited in the 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 utilise 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.
In the case of Maneka Gandhi Vs. Union of India : AIR 1978 SC 597 , it was held that the principle of reasonableness which legally as well as philosophically, is an essential element of equity or non-arbitrariness and it pervades Article 14 like a brooding omnipresence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14. Fair and reasonable exercise of power would be there only when the power is exercised in the manner prescribed in the provision of law conferring the power and for the purpose for achievement of which it exists. This would underline the importance of existence of reasons to believe that there is fraudulent or erroneous availment of credit standing in the ECL. In other words, the power under rule 86-A cannot be exercised unless there is a subjective satisfaction made on the basis of objective material by the authority.
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 nature of 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.
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.
There is another reason which we would like to state here to support our conclusion just made. The power under rule 86A 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. (Vide: Dee Vee Projects Ltd. v/s. Union of India & Ors., Writ Petition No.2693/2021, dated 11.02.2022 (Bombay High Court)).
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.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Having regard to the facts of the present litigation and also considering the present day scenario of the implementation of the Goods and Services Tax, Act, 2017, the following observations by the Constitution Bench of the Supreme Court in the case of Pannalal Binjraj vs. Union of India, AIR 1957 SC 397 are apt:
“A humane and considerate administration of the relevant provisions of the Income-tax Act would go a long way in allaying the apprehensions of the assessees and if that is done in the true spirit, no assessee will be in a position to charge the Revenue with administering the provisions of the Act with ” an evil eye and unequal hand “.
1.1 All that we need to do is to erase the expression “provisions of the Income Tax Act” and replace the same with the expression “provisions of the Goods and Services Tax Act, 2017”.
2. By this writ application under Article 226 of the Constitution of India, the writ applicant has prayed for the following reliefs:
“(a) That this Hon’ble Court be pleased to issue a Writ of Certiorari, or a Writ in the nature of Certiorari, or any other appropriate Writ, Order or direction, calling for the papers and proceedings leading to the records relating to blocking of Input Tax Credit of the Petitioner to the tune of Rs.97,17,290/ (Rupees Ninety Seven Lakhs Seventeen Thousand Two Hundred and Ninety Only) and after looking into the same and the legality thereof, this Hon’ble Court be pleased to quash and set aside the action of Respondent No.3 regarding blocking of Input Tax Credit of the Petitioner which has been shown on the login credential of GSTN portal of the Petitioner (Annexure-E);
(b) That this Hon’ble Court be pleased to issue a Writ of Mandamus, or a Writ in the nature of Mandamus, or any other appropriate writ Order or direction to the Respondents to unblock the Input Tax Credit to the tune of Rs.97,17,290/-(Rupees Ninety Seven Lakhs Seventeen Thousand Two Hundred and Ninety Only) of the Petitioner;
(c) for ad-interim relief in terms of prayer (b) above;
(d) for costs of the petition be provided; and
(e) for such further and other reliefs, as this Hon’ble Court may deem fit and proper in the facts and circumstances of the case.”
3. The facts giving to this writ application may be summarized as under:
3.1 The writ applicant is a proprietary concern. It is engaged in the trading of M.S. Scrap past 13 years. The proprietary firm purchases the scraps from different suppliers and sale the same to different entities. In the case on hand, the writ applicant is said to have purchased M.S. Scrap from one of its suppliers namely, M/s. Anmol Enterprise during the period between 22.12.2020 and 27.03.2021.
3.2 It is the case of the writ applicant that when it received the goods from the said supplier, it also received tax invoices, weighment slips, e-way bills etc. which are the documents prescribed for the purchase under the provisions of the CGST Act, 2017. It is also the case of the writ applicant that the purchase made by it were duly reflected in the Form GSTR – 3B, Form GSTR – 2A and Form GSTR – 2B respectively. It appears that one day, it came to the notice of the writ applicant that the respondent no.3 herein had blocked the ITC in exercise of power under Rule 86A of the Rules to the tune of Rs.97,17,290/- (Rupees Ninety Seven Lakhs Seventeen Thousand Two Hundred and Ninety Only) on the purchases made from M/s. Anmol Enterprise.
3.3 It is the case of the writ applicant that he came to know about such blocking of the ITC through E-mail and SMS on 28.07.2021. Upon receipt of an E-mail and SMS referred to above, the writ applicant checked up with the GST portal wherein it is was displayed that the ITC had been blocked by the respondent no.3 without assigning any reasons. It is the case of the writ applicant that he inquired with the respondent no.3 as to on what basis, the ITC was blocked but, there was no response at the end of the respondent no.3. In such circumstances referred to above, the writ applicant is here before this Court with the present writ application.
4. Mr. Modh, the learned counsel appearing for the writ applicant would submit that it was expected of the respondent no.3 to atleast convey the reasons, if not in details atleast in brief, for blocking the ITC under Rule 86A of the Rules. Mr. Modh would submit that without any reasons how would a dealer come to know as to why his ITC has been blocked. He would submit that all the transactions of his client with M/s. Anmol Enterprise are clean. If there is any information or material with the department to doubt the credentials of M/s. Anmol Enterprise then for such reason alone, the ITC of the writ applicant could not have been blocked. In other words, what Mr. Modh is trying to convey is that his client is a bona fide purchaser of the goods. The goods were delivered in accordance with law. In such circumstances referred to above, Mr. Modh prays that there being merit in his writ application, the same be allowed and the impugned order/action on the part of the respondent no.3 in blocking the ITC be quashed and set aside.
5. On the other hand, this writ application has been vehemently opposed by Mr. Utkarsh Sharma, the learned AGP appearing for the respondents. Mr. Sharma would submit that having regard to the satisfaction arrived at by the authority based on some information/material, it cannot be said that the action on the part of the respondent no.3 in blocking the ITC is illegal. Mr. Sharma, upon the request made by this Court has made available the satisfaction note dated 28.07.2021. The English translation of the same reads thus:
“With respect to the Letter No: XIV/001/2017 dated 12/07/2021 of Deputy Commissioner of State Tax (CGST & CE, DIV – I, Surat) and the Departmental Circular No – 19 dated 06/05/2020, Mr. Mohmadyusuf Abdulgafar Shaikh’s M/s. New Nalbandh Traders (GSTIN – 24AMMPS4317A1ZA) claimed tax credit of Rs. 97,17,290/- from Mr. Dipakbhai Rathod’s M/s. Anmol Enterprise (GSTIN-24BXMPR0367R1ZN) in December, 2020, January, 2021, February, 2021, March, 2021 and when CGST investigated at the main business location of M/s. Anmol Enterprise on 08/07/2021 under Rule – 25 of the CGST with regard to the said letter, no existence of the tax-payer was found. Thereafter, on conducting investigation with regard to the GSTRZA register, it appeared that purchase had been made by M/s. Nalbandh Traders from M/ s. Anmol Enterprise and on checking the GSTN Portal, the GST number of M/s. Anmol Traders was found suspended. Therefore, considering the legal provisions under Departmental Circular No – 19 dated 06/05/2020 and Gujarat Goods and Services Act, 2017 and Rules in the interest of the government revenue, I order to block the doubtful tax credit of Rs. 97,17,290/- for the purchase made from M/s Anmol Enterprise.
Sd/-
(Illegible)
The trader is instructed to prepare the intimation form DRC- 01A.
Sd/-
(Illegible)”
6. Mr. Sharma, also placed before us the intimation in Form GST – DRC -01A dated 30.07.2021, which reads thus:
“FORM GST DRC-01A
Intimation of tax ascertained as being payable under section 74(5)
[See Rule 142(1A)]
Part A
To,
NEW NALBANDH TRADERS
PLOT NO-14-13, OPP, JAY METAL TECH,
UDHYOGNAGAR UDHNA, ROAD NO-8, 394210
GSTIN-24AMMPS4317AIZA
Sub: Intimation of liability under section 74(5) of CGST/SGST act.
Please refer to the above proceedings. In this regard, the amount of tax/interest/ penalty payable by you under section 74(5) with reference to the said case as ascertained by the undersigned in terms of the available information, as is given below:
