2021 (7) TMI 1057 - HC - GST

Court affirms authority to block tax credit under Rule 86A for fraud, creates lien for revenue protection.

The court upheld the authority's power to block input tax credit under Rule 86A based on a positive 'reason to believe' of fraudulent availment or ... Power to restrict debit of electronic credit ledger under Rule 86A - Requirement of recorded reason to believe for exercise of Rule 86A - Creation of a lien on input tax credit as distinct from recovery or appropriation - Adjudication under the UP GST Act and determination of wrongly availed input tax credit - Mode and timing of recovery as prescribed by the UP GST ActPower to restrict debit of electronic credit ledger under Rule 86A - Creation of a lien on input tax credit as distinct from recovery or appropriation - Scope and effect of an order under Rule 86A - whether Rule 86A effects recovery or only creates a lien by disallowing debit of electronic credit ledger - HELD THAT: - Rule 86A does not constitute a recovery provision. Its operative power is to 'not allow debit of an amount equivalent to such credit in electronic credit ledger' for specified reasons recorded in writing. That prohibition operates as a lien securing the revenue's interest by blocking utilization of credit towards discharge of liabilities or claims of refund; it does not transfer title or appropriate the amount to the revenue. Appropriation or adjustment against any demand can arise only by application of the recovery provisions in the Act and Rules governing recovery (including the consequences of an adjudication order becoming final and the time-limits in the Act), and not by the exercise of power under Rule 86A alone. Accordingly, where no positive credit exists at the time of the Rule 86A order, the lien operates prospectively and attaches to future credit entries up to the limit specified in the order, but such blocked amounts cannot be adjusted in favour of the revenue except in accordance with the statutory recovery mechanism.Rule 86A creates a lien by disallowing debit of electronic credit ledger and is not a provision for recovery or appropriation of the blocked amount.Requirement of recorded reason to believe for exercise of Rule 86A - Adjudication under the UP GST Act and determination of wrongly availed input tax credit - Permissibility of invoking Rule 86A on the basis of recorded reason to believe and its temporal reference to 'input tax available' - HELD THAT: - The power under sub rule (1) of Rule 86A can be exercised only when the authorised officer has 'reasons to believe' that input tax credit that 'has been' available in the electronic credit ledger was fraudulently availed or was ineligible. The phrase 'input tax available' must be read in the context of the alleged prior availment (i.e., it refers back to credit that was availed at some earlier point and is the subject of the suspicion), not strictly to the positive balance standing on the date the Rule is invoked. Where competent material establishes a prima facie basis for that belief (for example, material indicating the supplier was non existent or not conducting business), the existence of a recorded reason to believe justifies the imposition of the restriction under Rule 86A for securing revenue's interest, leaving adjudication on merits to the appropriate forum under the Act.An order under Rule 86A may be validly made on a recorded prima facie reason to believe based on past availment of input tax credit; the term 'available' relates back to the alleged availing and not exclusively to the ledger balance on the date of the order.Mode and timing of recovery as prescribed by the UP GST Act - Creation of a lien on input tax credit as distinct from recovery or appropriation - Whether invocation of Rule 86A circumvents the statutory adjudication and recovery mechanism under the Act - HELD THAT: - The statutory scheme contemplates determination of wrongly availed or ineligible input tax credit by adjudication under the Act, and recovery is governed by the recovery provisions and rules. Rule 86A, being located in the chapter concerning payment of tax, operates independently to secure revenue by preventing debit of specified credits; it does not supplant the adjudicatory process or the prescribed mode and timing of recovery (including any statutory delays or conditions for appropriation). Consequently, applying Rule 86A does not render the requirement of adjudication and recovery under the Act otiose; any eventual appropriation or adjustment in revenue's favour must follow the statutory recovery procedure after adjudication and in accordance with the Act.Rule 86A may be used to secure revenue interests without prejudicing the statutory adjudication and recovery procedure; it cannot be employed to bypass the recovery mechanism prescribed by the Act.Final Conclusion: The writ petition challenging the Rule 86A order is dismissed. The Court holds that Rule 86A authorises a recorded restriction (a lien) on debit from the electronic credit ledger where there is a prima facie reason to believe certain input tax credit was fraudulently availed or ineligible; Rule 86A is not a recovery provision and any appropriation or adjustment in favour of the revenue must follow the statutory adjudication and recovery process under the Act. Issues:1. Jurisdiction of authorities to block input tax credit.2. Requirement of a positive 'reason to believe' for blocking credit.3. Premature nature of the order under Rule 86A.4. Interpretation of Rule 86A and its purpose.Issue 1: Jurisdiction of authorities to block input tax credit:The petitioner challenged the jurisdiction of the authorities to block any input tax credit over the available amount on the date of the order. The court examined the relevant provisions of the State/Central Goods and Services Tax Rules, emphasizing that the Act prescribes the manner for determining any tax not paid or short paid. The recovery provisions under Section 74 and Section 78 of the Act were crucial in understanding the authority's power to determine and recover tax amounts.Issue 2: Requirement of a positive 'reason to believe' for blocking credit:The petitioner argued that the authorities must have a positive 'reason to believe' that the credit of input tax was fraudulently availed or the petitioner was ineligible. The court analyzed Rule 86A of the Rules, which outlines specific conditions for blocking input tax credit, such as fraudulent availment or dealing with non-existent registered dealers. The court noted that the 'reason to believe' was based on material indicating non-existence of the selling dealer, justifying the blocking of credit.Issue 3: Premature nature of the order under Rule 86A:The petitioner contended that the order under Rule 86A was premature as adjudication proceedings were ongoing, and recovery could only occur after three months from the adjudication order. The court clarified that Rule 86A does not involve recovery but rather secures the revenue's interest by blocking credit, creating a lien without immediate recovery. The court emphasized that any further credit earned by the petitioner would be subject to the lien specified in the order under Rule 86A.Issue 4: Interpretation of Rule 86A and its purpose:The court interpreted Rule 86A, highlighting that it does not allow the revenue to reverse or appropriate credit in the electronic ledger but only to block it as a lien. The court differentiated between not allowing debit and appropriation, emphasizing that the rule aims to secure revenue interests. The court dismissed the petitioner's argument of a violation of legislative principles, stating that Rule 86A operates independently of recovery provisions and serves to protect revenue interests without immediate recovery.In conclusion, the court dismissed the writ petition, upholding the authority's power to block input tax credit under Rule 86A based on a positive 'reason to believe' of fraudulent availment or ineligibility, emphasizing the rule's purpose to secure revenue interests without immediate recovery.