Blocking of Input Tax Credit under Rule 86A: post decisional hearing required and reasoned order must follow provisional blocking

Blocking of input tax credit under Rule 86A may be exercised only on credible material indicating fraudulent or ineligible availing; the power is drastic and requires recorded reasons. Pre decisional hearing is not mandated in all cases, but affected persons must be afforded a post decisional hearing within a reasonable time to present objections and evidence, after which the authority must pass a reasoned order confirming or revoking the provisional block. Input tax credit remains a statutory concession subject to compliance, and taxpayers may discharge tax liabilities to continue operations during provisional blocking. Authorities must act fairly, reasonably, and on recorded material.

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Issues Involved:
1. Blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods and Services Tax Rules, 2017.
2. Violation of principles of natural justice.
3. Vested rights of ITC and its utilization.
4. Requirement of pre-decisional and post-decisional hearings.

Summary:

Issue 1: Blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods and Services Tax Rules, 2017:

The petitioners challenged the orders blocking their ITC in the Electronic Credit Ledger under Rule 86A of the Central Goods and Services Tax Rules, 2017. The respondents justified the blocking based on field reports indicating fraudulent transactions. The court examined the scope and applicability of Rule 86A, noting that it can be invoked only if the credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible. The court cited various judgments emphasizing that the power under Rule 86A is drastic and should be exercised with caution and based on credible material.

Issue 2: Violation of principles of natural justice:

The petitioners argued that the orders were issued without affording them an opportunity of hearing, violating the principles of natural justice. The respondents contended that neither the Act nor the Rules require a hearing before taking action under Rule 86A. The court acknowledged that while pre-decisional hearing might not always be feasible, a post-decisional hearing should be provided to comply with the principles of natural justice. The court referenced the judgment in Dee Vee Projects Ltd., which held that post-decisional hearing should be granted to the affected party within a reasonable period.

Issue 3: Vested rights of ITC and its utilization:

The court discussed the nature of ITC, noting that it is a concession granted under the statute and not a vested right. The utilization of ITC is subject to compliance with statutory conditions. The respondents argued that the petitioners could continue their business by effecting payment of the requisite tax amount, even if the ITC is blocked temporarily.

Issue 4: Requirement of pre-decisional and post-decisional hearings:

The court highlighted the need for recording reasons in writing when invoking Rule 86A, as it has significant civil consequences. The court emphasized that the power under Rule 86A should be exercised fairly and reasonably, following the principles of natural justice. The court directed the respondents to provide a post-decisional hearing to the petitioners, allowing them to file objections and supporting documents. The competent authority was instructed to pass a reasoned order within two weeks of the hearing, either confirming or revoking the provisional order of blocking the ITC.

Conclusion:

The writ petitions were disposed of with directions to the competent authority to afford a post-decisional hearing to the petitioners and pass a reasoned order based on the objections and supporting documents submitted by the petitioners. The court emphasized compliance with Rule 86A and the principles of natural justice in the process.

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