Case Law Details
HEC India LLP Vs Commissioner of GST and Central Excise Audit-II (Madras High Court)
GST Authority needs to communicate reasons for blocking ITC of the taxpayer
Hon’ble Madras High Court has held that the GST Authority necessarily needs to communicate reasons to the taxpayer if the taxpayer’s Input Tax Credit (ITC) is blocked.
In the present case, the Commissioner of GST and Central Excise had blocked any attempts of deduction from the electronic credit ledger of M/s HEC India LLP (Appellant) on unstated reasons by exercising its powers under Rule 86-A of the Central Goods and Services Tax Rules, 2017 (CGST Rules). As a result, without receiving any written reasons from the Commissioner of GST and Central Excise, the Appellant was prevented from receiving and utilizing its ITC. Thus, the Appellant preferred a writ petition before the Hon’ble Madras High Court and prayed for a relief that it may be allowed to deduct a certain sum from its electronic credit ledger.
The Hon’ble Madras High Court observed that Rule 86-A of the CGST Rules confers powers on the Commissioner or an officer authorized by him not below the rank of Assistant Commissioner may, for reasons to be recorded in writing, not allow debit of an amount equivalent to the credit suspected to be obtained fraudulently in electronic credit ledger for discharge of any liability under Section 49 of the Central Goods and Services Tax Act, 2017 or for claim of any refund of any unutilized amount. It was observed that the requirement of recording reasons in writing for exercising the said power and communicating the same to the Appellant was not fulfilled as no order invoking the power under Rule 86-A of the CGST Rules was communicated to the Appellant.
Hence, the Hon’ble Madras High Court held that power under Rule 86-A of the CGST Rules cannot be exercised without recording the reasons for invoking the power in writing and communicating the same to the taxpayer. Hence, if the ITC of a taxpayer is blocked by the GST Authority by invoking power under Rule 86-A of the CGST Rules, the reasons for doing so shall need to be recorded and communicated to the taxpayer.
Relevant Provisions:
Section 49 of the Central Goods and Services Tax Act, 2017-
“49. Payment of tax, interest, penalty and other amounts-
(1) Every deposit made towards tax, interest, penalty, fee or any other amount by a person by internet banking or by using credit or debit cards or National Electronic Fund Transfer or Real Time Gross Settlement or by such other mode and subject to such conditions and restrictions as may be prescribed, shall be credited to the electronic cash ledger of such person to be maintained in such manner as may be prescribed.
(2) The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with section 41, to be maintained in such manner as may be prescribed.
(3) The amount available in the electronic cash ledger may be used for making any payment towards tax, interest, penalty, fees or any other amount payable under the provisions of this Act or the rules made thereunder in such manner and subject to such conditions and within such time as may be prescribed. (4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed. (5) The amount of input tax credit available in the electronic credit ledger of the registered person on account of––
(a) integrated tax shall first be utilised towards payment of integrated tax and the amount remaining, if any, may be utilised towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order;
(b) the central tax shall first be utilised towards payment of central tax and the amount remaining, if any, may be utilised towards the payment of integrated tax;
(c) the State tax shall first be utilised towards payment of State tax and the amount remaining, if any, may be utilised towards payment of integrated tax;
(d) the Union territory tax shall first be utilised towards payment of Union territory tax and the amount remaining, if any, may be utilised towards payment of integrated tax;
(e) the central tax shall not be utilised towards payment of State tax or Union territory tax; and
(f) the State tax or Union territory tax shall not be utilised towards payment of central tax.
(6) The balance in the electronic cash ledger or electronic credit ledger after payment of tax, interest, penalty, fee or any other amount payable under this Act or the rules made thereunder may be refunded in accordance with the provisions of section 54.
(7) All liabilities of a taxable person under this Act shall be recorded and maintained in an electronic liability register in such manner as may be prescribed.
(8) Every taxable person shall discharge his tax and other dues under this Act or the rules made thereunder in the following order, namely: ––
(a) self-assessed tax, and other dues related to returns of previous tax periods;
(b) self-assessed tax, and other dues related to the return of the current tax period;
(c) any other amount payable under this Act or the rules made thereunder including the demand determined under section 73 or section 74.
(9) Every person who has paid the tax on goods or services or both under this Act shall, unless the contrary is proved by him, be deemed to have passed on the full incidence of such tax to the recipient of such goods or services or both.
Explanation. ––For the purposes of this section, —
(a) the date of credit to the account of the Government in the authorised bank shall be deemed to be the date of deposit in the electronic cash ledger;
(b) the expression, —
(i) “tax dues” means the tax payable under this Act and does not include interest, fee and penalty; and
(ii) “other dues” means interest, penalty, fee or any other amount payable under this Act or the rules made thereunder.”
Rule 86-A of the CGST Rules–
“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 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 unutilized 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.”
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
This appeal has been filed by the writ petitioner, which is registered on the file of the second respondent under the provisions of the Goods and Services Tax Act.
2. The writ petition was filed for issuance of a direction upon the respondents to permit the petitioner to debit a sum of Rs.47,30,457/- from its electronic credit ledger as shown in the ledger. The Learned Writ Court by order dated 30.07.2021 disposed of the Writ Petition, giving liberty to the petitioner to redress their grievances before competent authorities, as the Court cannot issue a direction as prayed for. Aggrieved by the same, the appellant is before us by way of this writ appeal.
3. We have heard Mr. Adithya Reddy, Learned counsel for the appellant and Mr. Mohana Murali, Learned Senior Standing Counsel, who accepts notice for the Respondents.
4. We agreed with the ultimate conclusion arrived at by the Learned Single Bench that the prayer sought for by the writ petitioner cannot be granted, while exercising jurisdiction under Article 226 of the Constitution of India, as the appellant sought for permission to debit a particular sum of money from its electronic credit ledger.
5. After hearing the Learned counsel appearing on either side for considerable length of time, we find that the prayer sought for in the writ petition was not very happily worded and the grievance of the appellant before the Learned Writ Court was blocking of the credit available in the credit ledger of the appellant by invoking Rule 86-A of Central Goods and Services Tax Rules, 2017 (‘CGST Rules’ for short). The said provisions confers powers on the Commissioner or an officer authorized by him not below the rank of any Assistant Commissioner, having reasons to believe that credit of input tax available in the credit ledger has been fraudulently availed or is ineligible, 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 of the Act or for claim of any refund of any unutilised amount. In Rule 86-A of CGST Rules, the various activities, which would render the assessee is ineligible to avail credit have been set out in Clauses (a) to (d) of Rule 86-A(1).
6. The appellant would contend that the prayer sought for by the writ petitioner was permitted them to adjust the credit available in their credit ledger. Because, no order invoking the power under rule 86-A was communicated to the appellant.
7. Learned Senior Standing Counsel appearing for the respondents submitted that the show cause notice was issued to the appellant by the second respondent on 17.12.2020 and the appellant had submitted his reply on 12.01.2021 and thereafter, he has made a representation on 22.06.2021. The show cause notice dated 17.12.2020 issued by the Assistant Commissioner of GST & Central Excise is proposing a demand for recovery of certain sums of money, on the alleged ground of nonpayment of IGST on ocean freight charges; wrong/ excess availment of Input Tax Credit etc. The reply given by the appellant-assessee would be considered by the authority and appropriate orders would be passed, pursuant to the same.
8. However, the power exercised by the respondents is under Rule 86-A. Undoubtedly, this power is a very drastic power conferred on the authority and precisely for such reason, the rule enumerates the various circumstances, under which, such a power could be exercised and they are relatable to any fraudulent activity or an activity, which would render the assessee ineligible to credit.
9. Before invoking the power under Rule 86-A, the Authority should have reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or the assessee is ineligible, on account of anyone of the contingencies in clauses (a) to (d) of Rule 86-A(i). That apart, the Rule contemplates that the said authorities has to record the reasons in writing and not allowed to debit any amount equivalent to such credit in the credit ledger. It is not clear as to why the appellant-assessee has not been intimated in writing as to what are the reasons, which waved the mind of the authority to invoke the power under Rule 86-A. The respondent cannot be heard to say that they can invoke the power under Rule 86-A without having reasons to believe and without recording such reasons in writing. This is a pre-requisite and in the absence any reason, which has been recorded, the invocation of power under Rule 86-A should be held to be unauthorised, illegal and without jurisdiction. Probably, if the respondent is right in saying that prior to the order of not allowing the debit of the credit, the assessee cannot expect a show cause notice to be issued. But nevertheless the power under Rule 86-A has been invoked and reasons have been recorded that needs to be communicated to the assessee so as to enable the assessee to put forth his objections and pray for release of the blocking of the electronic credit ledger. It is no doubt true that there is no such procedure provided for under Rule 86-A. Nevertheless, we are required to read the principles of natural justice into the said Rule.
10. In this regard, we rely on the decision of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Limited Vs. ITO reported in (2003) 259 ITR 19 (SC), wherein, the Hon’ble Supreme Court has laid down a procedure, which is required to be adopted by the Assessing Officer in cases, where the assessments are reopen under Section 143(3) of the Income Tax Act, 1961. The Hon’ble Supreme Court has held that the assessee is entitled to seek for reasons for reopening and if sought for, the Assessing Officer is bound to furnish the same. It is thereafter, the assessee is entitled to file their objections to the reopening of the assessment and the objections is required to be disposed of by the Assessing Officer by passing a speaking order.
11. Courts have held as against such order passed by the Assessing Officer rejecting the objections to the reopening, the Act having not provided any remedy, Writ Petitions are entertained by the Court under Article 226 of the Constitution of India. The unrelying principles, which can be culled out from the decision of the Hon’ble Supreme Court is that, the assessee should be afforded an opportunity of hearing and he is entitled to know as to why the assessment is sought to be reopened and he is also entitled to object to such reopening done by the Assessing Officer. The same analogy can be applied to the case on hand. If the authority concerned has reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or the assessee is ineligible on anyone of the grounds set out in the clauses from (a) to (d) of Rule 86-A(1), then, the authority, after recording the reasons may not allow to debit of any amount equivalent to such credit in the electronic credit ledger. But, after doing so, the authority is bound to communicate the reasons, which weighed in his mind to pass such an order and not allow credit of any amount equivalent to such credit in the electronic credit ledger. On receipt of such reasons, the assessee is entitled to put forth his submission/objection requesting for lifting of such order and establishing a case that there has not been any fraudulent availment of credit or the assessee would not fall within anyone of the contingencies mentioned in clauses (a) to (d) of Rule 86-A(1) so as to make them ineligible for the credit.
12. In the light of the above, we are of the clear view that the authority viz., respondents are bound to consider the Appellant’s representation dated 22.06.2021. The representation given by the Appellant dated 22.06.2021 is by stating that they have availed credit in accordance with the provisions of the Act and Rule, and they have also pleaded the hardship caused on account of the order passed under Rule 86-A. Since the appellant-assessee did not have the benefit of the reasons on what ground the order under Rule 86-A was passed, the representation is only general in nature. Therefore, for an effective representation to be made the Appellant is entitled to know the reasons, based on which the power under Rule 86-A was invoked by the second respondent.
13. In the result, the Writ Appeal is allowed and the order passed in the writ petition is set aside and writ petition is disposed of by directing the respondents or any other officers, who have been authorized by the first respondent to communicate the reasons recorded in writing before invoking the powers under Rule 86-A to the appellant, within a period of one week from the date of receipt of a copy of this order and on receipt of the same, the appellant is entitled to file his objections within a period of three (3) days, thereafter, and on receipt of the objections, the concerned authorities shall pass an order and if the concerned authority is satisfied with the explanation may revoke the order passed under Rules 86-A or otherwise pass a speaking order as to why the request made by the appellant cannot be complied with and communicate to the appellant within a period of seven (7) days, thereafter. In such an event, it will be open to the appellant to question the said order in the manner known to law. No costs.
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