2020 (12) TMI 1120 - HC - GST

Court rejects writ applications on Rule 86A, stresses credible evidence over suspicion. Calls for guidelines.

The court rejected both writ applications, emphasizing that the invocation of Rule 86A must be based on credible material and not mere suspicion. The ... Indefeasible right vis-a-vis the benefit of the ITC - Rule 86A of the CGST Rules inserted vide the Notification No.75/2019-CT dated 26th December, 2019 in the CGST Rules - power and procedure for blocking the input tax credit (ITC) in the electronic credit ledger of a registered person during any inquiry or investigation - scope of exercise of power under Rule 86A of the Rules - whether the authority concerned is empowered to retain any amount deposited by a registered person during any inquiry or investigation in the absence of any confirmed liability against the assessee and, more particularly, without issuance of a show-cause notice and assessment/adjudication order imposing any tax liability on the assessee? HELD THAT:- the Supreme Court categorically considered the aspect of availing the credit and utilization of credit as two different stages and declared that the utilization of the accrued credit is a vested right. No vested right accrues before taking credit. - the vociferous submission of Mr. Dave, the learned counsel appearing for the writ applicants as regards the indefeasible right to avail the ITC vis-a-vis Rule 86A of the Rules should fail and hereby fails. Scope of powers under Rule 86A - Rule 86A talks about “reason to believe” which is necessary to be formed for the purpose of blocking the input tax credit in cases of inquiry or investigation into fraudulent transactions. Any opinion of the authority to be formed is not subject to objective test. The language leaves no room for the relevance of an official examination as to the sufficiency of the ground on which the authority may act in forming its opinion - there must be material, based on which alone the authority could form its opinion that it has become necessary to block the input tax credit pending an inquiry or investigation into the fraudulent transactions of fake/bogus invoices. The existence of relevant material is a pre-condition to the formation of the opinion. In the absence of any cogent or credible material, if the subjective satisfaction is arrived at by the authority concerned for the purpose of blocking the ITC in exercise of power under Rule 86A of the Rules, then such action would definitely amount to malice in law. Malice, in its legal sense, means such malice as may be assumed from the doing of a wrongful act intentionally but also without just cause or excuse or for want of reasonable or probable cause. Any use of discretionary power exercised for an unauthorized purpose amounts to malice in law. It is immaterial whether the authority acted in good faith or bad faith. Thus, it cannot be said that the inquiry or investigation initiated as regards the fake/bogus invoices for the purpose of ITC is malafide or based on absolutely no materials. From what has been stated in the reply affidavit filed on behalf of the respondents, it could be said that prima facie, there is something which the Revenue has noticed and, therefore, are looking into the same before taking any final call as regards the claim of the writ applicants to avail the ITC. Even, otherwise, Rule 86A provides that on expiry of the period of one year, the restriction shall cease to have effect from the date of imposition of such restriction. Whether Rule 86A of the Rules contemplate any passing of a specific order with an obligation to communicate the same to the affected person so that such person can take recourse to any legal remedy available to him? - HELD THAT:- Section 83 provides for order in writing. In other words, if the Commissioner is of the opinion that for the purpose of protecting the interest of the Government Revenue, it is necessary to attach provisionally any property including bank account, he may, by order in writing, do so. Even Section 83 of the Act talks about order to be passed in writing on the basis of the reasonable belief of the concerned authority - it is clear that the provisional attachment in terms of Section 11DDA and Section 73C could be made only after issuance of a show-cause notice. Rule 86A casts an obligation upon the authority concerned to form an opinion but is silent with regard to passing of any specific order assigning prima facie reasons for invoking Rule 86A. To this extent, the Government needs to look into the matter and issue appropriate guidelines and also lay down some procedure to be followed for the exercise of power under Rule 86A of the Rule - In the case on hand, the inquiry, so far, has revealed a prima facie case for the respondents to exercise the power under Rule 86A of the Rules. Although, no specific order has been passed and communicated to the writ applicants in this regard, yet in the facts of the present case, it cannot be said that exercise of power under Rule 86A for the purpose of blocking the ITC is mala fide or without any application of mind. There are highly disputed questions of fact as regards the debit of the ITC from the electronic credit ledger. Indisputably, the investigation is in progress. A prima facie case could be said to have been made out against the writ applicants. However we may only say that the investigation cannot continue for an indefinite period of time. Almost more than a year has elapsed and, in such circumstances, the authorities concerned should arrive at some conclusion or the other. Even Rule 86A of the Rules prescribes one year time limit - the respondents are directed to complete the investigation within a period of four weeks from the date of the receipt of this order and take an appropriate decision whether any case has been made out for issue of show-cause notice under Section 74 of the Act or not. Application dismissed. Issues Involved:1. Interpretation of Rule 86A of the CGST Rules.2. Scope of exercise of power under Rule 86A.3. Legality of blocking input tax credit (ITC) without confirmed liability or show-cause notice.4. Debiting ITC without demand or final assessment order.5. Whether the authorities can retain amounts deposited during an inquiry or investigation.Detailed Analysis:1. Interpretation of Rule 86A of the CGST Rules:The first issue concerns the interpretation of Rule 86A, which deals with the power and procedure for blocking ITC in the electronic credit ledger of a registered person. The court analyzed Rule 86A and noted that it provides the Commissioner or an authorized officer the power to block ITC if there is a reason to believe that the credit has been fraudulently availed or is ineligible. The court emphasized that 'reason to believe' must be based on credible material and not mere suspicion.2. Scope of Exercise of Power under Rule 86A:The second issue pertains to the scope of the authority's power under Rule 86A. The court highlighted that the power under Rule 86A is drastic and should be exercised with caution and based on cogent material. The court stated that the subjective satisfaction of the authority must be supported by credible material and should not be arbitrary or whimsical. The court also noted that the power should not be used as a tool to harass the assessee or have an irreversible detrimental effect on their business.3. Legality of Blocking ITC without Confirmed Liability or Show-Cause Notice:The court examined whether the authority could block ITC without a confirmed liability or issuance of a show-cause notice. The court concluded that while Rule 86A does not explicitly require the issuance of a show-cause notice, the formation of the opinion to block ITC must be based on credible material. The court observed that the absence of a specific order or communication to the affected person could lead to arbitrary use of power and emphasized the need for guidelines or procedures to be laid down by the government.4. Debiting ITC without Demand or Final Assessment Order:In the connected writ application, the issue was whether the authorities could debit a sum from the credit ledger without any demand or final assessment order. The court noted that the ITC was debited under pressure, and the investigation was still in progress. The court directed the authorities to complete the investigation within four weeks and take an appropriate decision on issuing a show-cause notice under Section 74 of the CGST Act.5. Whether the Authorities Can Retain Amounts Deposited During an Inquiry or Investigation:The court addressed the issue of whether the authorities could retain amounts deposited by the assessee during an inquiry or investigation. The court referred to previous judgments and concluded that unless there is an assessment and demand, the amount deposited under coercion or threat cannot be retained by the revenue. The court emphasized that the revenue must act within the statutory framework and cannot retain money without legal sanction.Conclusion:The court rejected both writ applications, emphasizing that the invocation of Rule 86A must be based on credible material and not mere suspicion. The court directed the authorities to complete the investigation within a specified timeframe and take appropriate action. The court also highlighted the need for the government to issue guidelines or procedures for invoking Rule 86A to prevent its arbitrary use. The court clarified that it did not address the constitutional validity of Rule 86A, leaving it open for future challenges.