Whether blocking of input tax credit in Electronic Credit Ledger under Rule 86A without assigning any reasons is sustainable – M/s. New Nalbandh Traders
Case 1
R/Special Civil Application No. 17202 Of 2021
Judgement : The Gujarat High Court has held that under Rule 86A the department cannot block the input tax credit (‘ITC’) without evidencing existence of reasons to believe as input tax credit being fraudulently availed and without recording any reasons in writing.
Fact of the case
The petitioner, a proprietary concern, is in the business of trading in M.S. scrap for the past 13 years and had purchased M.S. Scrap from one of its suppliers i.e. M/s Anmol Enterprise during the period between December 2020 and March 202. The goods were received from the supplier along with the tax invoices, weighment slips, e-way bills, etc., and that the purchases made were duly reflected in the Form GSTR-3B, Form GSTR-2A, and Form GSTR-2B, respectively.
The respondent/department had blocked the ITC in the exercise of power under Rule 86A of the CGST Rules to the tune of Rs. 97,17,290 on the purchases made from M/s. Anmol Enterprise without assigning any reasons.
Argument by Petitioner
The counsel for the petitioner argued the following:
1. Department to convey the reasons, atleast in brief, for blocking the ITC under Rule 86A of the Rules.
2. All the transactions of the petitioner with M/s. Anmol Enterprise are clean.
3. Petitioner is a bona fide purchaser of the goods.
4. The goods were delivered in accordance with law.
5. Impugned order for blocking the ITC be quashed and set aside.
Argument by Department
The Learned Assistant Government Pleader contended the following against the writ application:
1. That the satisfaction arrived at by the department is based on some information/material and it cannot be said that the action on the part of the department in blocking the ITC is illegal.
2. No existence of M/s. Anmol Enterprise was found on 08/07/2021 when CGST investigated the business location of the supplier.
3. The GSTIN of M/s. Anmol Traders was found suspended on the GSTN portal.
4. Petitioner does not satisfies the conditions u/s 16 of CGST/SGST Act and uses of ITC under rule 86(A)(1) since supplier Anmol Enterprise has not conducted any business from any place for any period during which registration has been obtained and found a FAKE/BOGUS UNIT.
5. He urged that the inquiry is still in progress and that although 7 months have elapsed, since the ITC came to be blocked, no show cause notice has been issued till this date under Section 73 or 74 of the CGST Act.
Legal Issue
Whether blocking of input tax credit in Electronic Credit Ledger (‘ECL’) under Rule 86A without assigning any reasons is sustainable
Observation of Court
The court observed that the order blocking the ITC was bereft of any reasons, and there was no question of any reflection of the authority passing the order on being satisfied about the necessity of passing it. When the first requirement of Rule 86A of the CGST Rules is “having reasons to believe” and it has manifestly not been followed, the impugned order would have to be treated as erroneous in law.
The second requirement regarding the recording of reasons in writing is also followed in breach. In such circumstances, it can be said that the case on hand is one of an arbitrary exercise of power under Rule 86A of the CGST Rules.
Since Section 43A has not been notified till date, the blocking of a petitioner’s ECL on the account of default of a supplier, vide rule 86A, is wanting of statutory backing at present. The notification of rule 86A prior to the section 43A is indicative of the fact that the rule did not intend to draw the validity from section 43A.
It was held that “The impugned order of blocking of the ECL of the writ
applicant is hereby quashed and set aside. The respondents are at liberty to pass a fresh order under Rule 86A of the Central Goods and Service Tax Rules, 2017 in accordance with law.”
Comments
An analysis of rule 86A of the CGST Rules reveals that it may subject a bonafide assessee/recipient to undue hardship by the blocking their ECL, where credit was rightfully claimed, due to the default of their supplier.
The provisions made in rule 86A 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 86A would be unsustainable in the eye of law.
Past Precedents : Samay Alloys India (P.) Ltd. v. State of Gujarat – [2022] 135 taxmann.com 243 (Gujarat)
Facts: The petitioner was filing GST returns and noticed that the portal displayed a message that the electronic credit ledger had been blocked. Despite the fact that there was no credit balance in the electronic credit ledger, ITC was blocked, and negative balance was entered. It filed writ petition challenging the same.
Legal issue: Whether authorities can block electronic credit ledger under Rule 86A when balance is nil.
Held: The Honourable High Court observed that Rule 86A allows proper officer to disallow debit from ECL for limited period of time and not to make debit entries in ECL. But the department has no power to negatively block credit to be availed in future. If credit is fraudulently availed and utilised then appropriate proceeding under Section 73 or 74 can be initiated but not under Rule 86A. Therefore, it was held that blocking of ECL under Rule 86A and insertion of negative balance in ledger when no ITC was available was without jurisdiction and illegal.
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