Court rules in favor of petitioner challenging CGST Act provision, limits on input tax credit. Electronic credit ledger restrictions cease automatically after one year.

The Court ruled in favor of the petitioner in a case challenging the vires of Section 16(2)(c) of the CGST Act, 2017, related to input tax credit. The Court issued a rule for consideration and notice to the Attorney General. Regarding the provisional attachment under Rule 86A of the CGST Rules, the Court held that restrictions on the use of the electronic credit ledger must automatically cease after one year and cannot be extended beyond that period. The Court directed the release of the petitioner's electronic credit ledger from restrictions and scheduled further proceedings on the writ petition.

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Issues:
1. Challenge to the vires of Section 16(2)(c) of Central Goods and Services Tax Act, 2017.
2. Provisional attachment under Rule 86A of Central Goods and Service Tax Rules, 2017.
3. Interpretation of Rule 86A and its implications on the petitioner's case.

Analysis:
1. The petitioner challenged the vires of Section 16(2)(c) of the CGST Act, 2017, which pertains to claiming input tax credit. The petitioner argued that denying input tax credit on purchases where tax has already been paid would result in double taxation. Various High Courts had dealt with similar provisions in other tax statutes, either reading them down or striking them down as unconstitutional. The petitioner's input tax credit account was attached due to the selling dealer's failure to deposit tax, and the petitioner sought relief. The Court issued a rule for consideration and notice to the Attorney General was directed.

2. The petitioner filed an interlocutory application challenging the provisional attachment of their ledger account under Rule 86A of the CGST Rules. The petitioner contended that the attachment, ordered by the Commissioner, had exceeded the permissible one-year period. The petitioner, a trader, had paid GST on purchases, but the tax was not deposited by the purchaser. The respondents opposed the application, citing the need to safeguard revenue. Rule 86A allows restrictions on the use of the electronic credit ledger for a maximum of one year, with specific conditions for imposing and lifting such restrictions. The Court held that the restrictions must cease after one year automatically, and the department cannot continue the restrictions beyond the stipulated period.

3. The Court interpreted Rule 86A, emphasizing that restrictions on the use of the electronic credit ledger are temporary and must be lifted after one year. The decision to impose restrictions must be based on specific reasons recorded in writing, and any permanent disallowance requires adjudication and a formal order. The Court directed the release of the petitioner's electronic credit ledger from the imposed restrictions, allowing them to utilize the credited amount for tax payments. No further relief was granted at that stage, and the respondents were directed to file a full reply to the main petition for further proceedings. The interlocutory application was disposed of, and the writ petition was scheduled for a later date.

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