Only Commissioner or Above Can Block ITC Under Rule 86A(1); Mechanical Notices Without Authority Are Invalid

The HC held that only a Commissioner or an officer not below Assistant Commissioner with reasons to believe that ITC was fraudulently availed or ineligible under Rule 86A(1)(a)-(d) can block ITC. In the present case, respondents lacked any material to form such belief, and the show cause notice was issued mechanically without authority under Section 74 CGST Act. The Court found the impugned instructions requiring demand creation before unblocking ITC, even after one year, contrary to Rule 86A(3). Consequently, the show cause notice and order blocking ITC were quashed and set aside, allowing the petition.

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Issues Involved:
1. Legality of the blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods & Services Tax Rules, 2017.
2. Validity of the show cause notice and the subsequent order under Section 74 of the Central Goods and Services Tax Act, 2017.
3. Legality of the instructions issued by the Department of Trade & Taxes (Policy Branch), Government of NCT of New Delhi.

Issue-wise Detailed Analysis:

1. Legality of the blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods & Services Tax Rules, 2017:
The petitioner argued that the blocking of ITC was done without any tangible material or justifiable reasons, merely on the instruction of another authority, which is impermissible. The court referred to Rule 86A, which allows blocking of ITC if the Commissioner or an authorized officer has "reasons to believe" that the credit was fraudulently availed or is ineligible. The court emphasized that such action is a drastic step and must be based on clear legislative checks and balances. The court cited various judgments, including *Sunny Jain v. Union of India & Ors.*, to highlight that the reasons for blocking ITC must be recorded in writing and based on tangible material, not mere suspicion. The court found that the respondents had no tangible material to form a belief that the ITC was availed fraudulently and had acted solely on the directive of another authority.

2. Validity of the show cause notice and the subsequent order under Section 74 of the Central Goods and Services Tax Act, 2017:
The petitioner challenged the show cause notice and the subsequent order for being mechanical and without any particulars. The court noted that a show cause notice under Section 74 can only be issued where it appears to the proper officer that the tax has not been paid, short paid, or the ITC has been wrongly availed or utilized by reason of fraud, wilful-misstatement, or suppression of facts. The court found that the respondents had no material to form any opinion that the ITC was availed wrongly due to fraud or misstatement. The show cause notice was issued in a mechanical manner, merely to comply with the impugned instructions, and thus, was not in conformity with Section 74 of the CGST Act and without authority of law.

3. Legality of the instructions issued by the Department of Trade & Taxes (Policy Branch), Government of NCT of New Delhi:
The petitioner also assailed the instructions, which suggested creating a demand by disallowing ITC and appropriating the blocked ITC against the demand. The court noted that the instructions cannot override the provisions of the Act and Rules. The instructions suggested issuing a show cause notice and creating a demand before unblocking ITC, even if the period of one year had elapsed, which is contrary to Rule 86A(3). The court held that the impugned instructions, to the extent they suggest continuing to block ITC beyond one year, are unsustainable and set them aside.

Conclusion:
The court allowed the petition, setting aside the impugned show cause notice and order, and directed the respondents to restore the appropriated ITC to the petitioner's Electronic Credit Ledger. The court clarified that the respondents are not precluded from ascertaining the petitioner's liability under the DGST Act or the CGST Act in accordance with the law.

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