Mandatory Requirement of Written 'Reasons to Believe' Under Rule 86A for Blocking Input Tax Credit (ITC)

The Hon’ble Allahabad High Court in the case of M/s Pilcon Infrastructure Pvt. Ltd. Versus State of U.P. and Another - 2025 (11) TMI 359 - ALLAHABAD HIGH COURT held that blocking of Input Tax Credit under Rule 86A of the U.P. GST Rules without recording specific, written ‘reasons to believe’ linking the assessee to fraudulent transactions is without jurisdiction and illegal, emphasizing that mere reliance on ex parte communications or generic alerts from DGGI does not fulfil the statutory requirement.

Facts:

Pilcon Infrastructure Pvt. Ltd. ('the Petitioner') had input tax credit (ITC) amounting to Rs. 13,96,220/- blocked by Respondent no.2, the State Commissioner of GST, U.P. in the Electronic Credit Ledger (ECL) based on an internal alert from Directorate General of GST Intelligence (DGGI), which alleged its supplier M/s Maa Kamakhaya Trading was non-operational and engaged in fraudulent tax credit transactions.

The Respondent ('the Respondent') blocked the ITC citing the reason 'Supplier found non-functioning' in the ECL without recording detailed written reasons as required under Rule 86A(1) of the U.P. GST Rules 2017.

The Petitioner contended that the action lacked jurisdiction as no 'reasons to believe' were recorded in writing by the competent authority before blocking the ITC.

The Respondent contended that no hearing is mandated under Rule 86A, but the Petitioner can file representations post-blocking under Rule 86A(2).

The Petitioner’s grievance was that blocking ITC without fulfilling the mandatory precondition of recording reasons in writing was illegal, thus they moved the High Court by writ petition under its jurisdiction challenging the blocking of ITC.

Issue:

Whether the blocking of Input Tax Credit under Rule 86A of the U.P. GST Rules without recording specific, written 'reasons to believe' linking the petitioner to fraudulent transactions is legal and valid?

Held:

The Hon’ble Allahabad High Court held as under:

• Observed that, no specific 'reason to believe' had been recorded in writing by the officer before blocking the petitioner’s ITC, making the action without authority and jurisdiction under Rule 86A(1).
• Noted that the recorded reason, i.e 'Supplier found non-functioning' was a generic conclusion based on an ex parte DGGI alert and did not demonstrate application of mind or material facts specifically linked to the petitioner.
• Held that mere suspicion or generic allegations cannot justify disruption of the ITC chain which is central to the GST regime.
• Set aside the action of blocking ITC and directed the authorities to forthwith unblock the Assessee’s ITC in the ECL.
• Held that, the Revenue has the liberty to initiate fresh proceedings strictly in accordance with law and after recording requisite reasons.

Our Comments:

The Supreme Court in the case of State of Uttar Pradesh & Ors. Versus M/s. Aryaverth Chawl Udyoug & Ors. - 2014 (11) TMI 1095 - Supreme Court has observed that such material on which the assessing authority bases its opinion must not be arbitrary, irrational, vague, distant or irrelevant. It must bring home the appropriate rationale of action taken by the assessing authority in pursuance of such belief.

This judgment by the Allahabad High Court strictly enforces the statutory mandate under Rule 86A of the U.P. GST Rules for recording written reasons before blocking ITC, aligning with the Supreme Court principles requiring rational grounds germane and linked to the belief held by the authority.

Relevant Provisions:

Rule 86A, U.P. GST Rules 2017:

“Rule 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 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.”

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