2022 (12) TMI 653 - HC - GST

Blocking Electronic Credit Ledger beyond one year under Rule 86A(1) is unauthorized; ITC reclaim allowed after payment to supplier

The HC held that blocking the Electronic Credit Ledger (ECL) beyond one year under Rule 86A(1) of the CGST Rules is impermissible and must be limited to ... Blocking the Input Tax Credit (ITC) - Electronic Credit Ledger (ECL) - Non payment of consideration within 180 days u/s 16(2)(d) of CGST Act - scope of the expression “in as much as” under Rule 86A - ITC was blocked without informing the petitioner or without affording the petitioner any opportunity to be heard. - in terms of Rule 86A, it was impermissible to block the ECL for a period exceeding one year. HELD THAT:- The words “inasmuch as” as used in Rule 86A(1) of the CGST Rules qualify the word “ineligible”. The expression “inasmuch as” is not of a wide import; it is used in a restrictive sense to qualify the subject. If the expression “inasmuch as” is considered as synonymous with ‘because’ or ‘since’, the sub clauses of Rule 86A(1) of the CGST Rules would qualify the word “ineligible” and exclude the possibility of expanding the import of the said word. - the expression “inasmuch as” cannot be considered as an expression that is used in an expansive sense, it qualifies the subject and restricts the provision that it qualifies. The use of the expression “inasmuch as” restricts the scope of ineligibility to the conditions as set out in sub clauses of Rule 86A(1) of the CGST Rules. It is only if any of these conditions are satisfied that the restriction under Rule 86A(1) can be imposed in respect of ITC on the ground that the ITC available in the taxpayer’s ECL is ‘ineligible’. Scope of Section 16(2) of the GST Act read with Rule 37 of CGST Rules - It is, clearly, not the scheme of the CGST Act to restrain a person from availing the ITC till he has paid the supplier for such goods/services. A recipient of goods/services who receives goods and services on supplier’s credit is also entitled to avail the ITC. However, if he fails to discharge his liability within a period of 180 days (one hundred and eighty days), he is liable to disgorge the benefit of the ITC along with interest. The taxpayer’s liability to account for the ITC availed without paying for the same within the period of 180 days, is required to be assessed as a part of his output liability. If the taxpayer does not discharge his liability to the supplier within a period of 180 days, he is required to account for the benefit of the ITC availed by the taxpayer along with interest as a part of the output liability. In terms of the third proviso to Section 16(2) of the CGST Act, the taxpayer would be entitled to avail of the ITC once again on payment being made to the supplier. The respondents have completely misdirected themselves in proceeding on the basis that unless a taxpayer pays the supplier, he is ineligible to avail of the ITC lying to his credit in the ECL. The action of the respondents to continue blocking the ITC available in the ECR of the petitioner for such extended period is without the authority of law. Decided in favor of assessee. Issues Involved:1. Blocking of Input Tax Credit (ITC) without prior notice.2. Legality of blocking ITC for a period exceeding one year.3. Requirement of payment to the supplier for availing ITC.4. Interpretation of Rule 86A of the CGST Rules, 2017.5. Provisions under Section 16(2) of the CGST Act, 2017.Detailed Analysis:1. Blocking of Input Tax Credit (ITC) without prior notice:The petitioner challenged the respondents' action of blocking ITC amounting to Rs. 1,37,17,022/- without providing prior notice or an opportunity to be heard. The respondents admitted that the ITC was blocked without informing the petitioner and later communicated the unblocking and re-blocking of ITC via system-generated emails. This action was deemed impermissible as it contravened the principles of natural justice.2. Legality of blocking ITC for a period exceeding one year:The petitioner argued that under Rule 86A of the CGST Rules, the ITC could not be blocked for more than one year. The respondents blocked the ITC on 11.02.2020 and continued to block it beyond the permissible period. The court noted that the restriction under Rule 86A(3) ceases to have effect after one year, and thus, the extended blocking was without legal authority.3. Requirement of payment to the supplier for availing ITC:The respondents contended that the petitioner was ineligible to avail ITC as he had not paid the supplier (D.G. Impex) within 180 days, as required under Section 16(2) of the CGST Act. The petitioner disputed this, arguing that he had not utilized the ITC and that recovery of interest could not be effected without issuing a show cause notice. The court clarified that the CGST Act does not restrain a person from availing ITC until payment is made to the supplier. Instead, if the payment is not made within 180 days, the ITC availed must be reversed with interest.4. Interpretation of Rule 86A of the CGST Rules, 2017:Rule 86A allows the Commissioner or an authorized officer to block ITC if it is believed to be fraudulently availed or ineligible. The court emphasized that blocking ITC is a drastic measure and must be strictly construed. The expression 'inasmuch as' in Rule 86A restricts the scope of ineligibility to specific conditions, such as non-existent suppliers or non-receipt of goods/services. The court found no allegation that the petitioner fraudulently availed ITC, only that he was ineligible under Section 16(2).5. Provisions under Section 16(2) of the CGST Act, 2017:Section 16(2) outlines conditions for availing ITC, including possession of a tax invoice, receipt of goods/services, and payment of tax to the government. The second proviso mandates that if payment is not made within 180 days, the ITC availed must be added to the output tax liability with interest. The court highlighted that the scheme does not prevent availing ITC initially, but requires reversal if payment is delayed. The third proviso allows re-availing ITC upon subsequent payment.Conclusion:The court concluded that the respondents misinterpreted the provisions and wrongly blocked the ITC. The action of blocking ITC for an extended period was without legal authority. The court directed the respondents to unblock the ITC immediately but clarified that they could take necessary steps to recover any ITC with interest if required under the second proviso to Section 16 of the CGST Act.