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 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.

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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.

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