Electronic Credit Ledger Restrictions Under Rule 86 A Challenged: Procedural Fairness Demands Transparent Justification for Credit Disallowance

HC found Rule 86 A of CGST Rules challenged regarding electronic credit ledger restrictions. Court directed respondent to provide "reasons to believe" document to petitioner, enabling further objections. The ruling emphasized procedural fairness, requiring authorities to substantiate credit disallowance with objective evidence and allowing taxpayer an opportunity to contest the action through proper legal mechanisms.

---

---

Issues:
Challenge to action under Rule 86 A of the Central Goods and Services Tax Rules, 2017.

Analysis:
The petitioner raised a grievance regarding the action taken under Rule 86 A of the CGST Rules. Rule 86 A empowers the Commissioner or an authorized officer to disallow the debit of an amount from the electronic credit ledger if there are reasons to believe that the credit of input tax has been fraudulently availed or is ineligible. The rule specifies grounds for such belief, including availing credit on non-existent suppliers, without receiving goods or services, on unpaid tax invoices, by non-existent businesses, or without valid documents. The authority must form an opinion after considering all facts, including the nature of fraudulently availed credit and the necessity to restrict its utilization to protect revenue interests.

The Central Board of Indirect Taxes and Customs issued a circular emphasizing that the power under Rule 86 A should not be exercised mechanically but after a careful examination of all case facts. The circular highlighted the extraordinary nature of this power, requiring circumspection and caution in its application. It stressed the need for an objective determination based on material evidence related to fraudulent or ineligible input tax credit. The circular aimed to prevent the abuse of this power by advising against subjective considerations and promoting intelligent evaluation based on available evidence.

The court noted that neither the petitioner nor the respondents had provided a copy of the "reasons to believe" as required by the rule. It emphasized that the concerned officer must furnish these reasons to the assessee, who can then file objections. The officer is obligated to dispose of these objections by passing a speaking order. Consequently, the court directed one of the respondents to provide the petitioner with a copy of the "reasons to believe" by a specified date, allowing the petitioner to file further affidavits or amend the petition if necessary. The case was adjourned to a later date for further proceedings.

---