Delhi HC quashes show-cause notice blocking Input Tax Credit for being vague and lacking specific justification

Delhi HC set aside a show-cause notice blocking petitioner's Input Tax Credit for being vague and lacking specific reasons for demand. The court held that the notice was a mechanical reproduction of statutory provisions without proper justification. The proper officer failed to state specific reasons for raising demand as required by principles of natural justice. The circular cited could not permit mechanical creation of demands without valid grounds. Since the notice contained no meaningful allegations and was incapable of eliciting proper response, proceedings were quashed and petition disposed of.

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Issues Involved:
1. Blocking of Input Tax Credit (ITC)
2. Issuance of Show Cause Notice under Section 73 of the CGST Act
3. Claim for Interest on Blocked ITC

Summary:

1. Blocking of Input Tax Credit (ITC):
The petitioner was aggrieved by the blocking of its ITC amounting to Rs. 1,77,81,200/-. The petitioner had transitioned ITC from the VAT regime to the GST regime by filing the requisite form (GST Tran-I) on 07.10.2017. The ITC was blocked in June 2018 without any plausible reasons, and despite several representations and complaints, no resolution was provided. The respondents later unblocked the ITC automatically with effect from 08.04.2022, rendering the petitioner's grievance moot.

2. Issuance of Show Cause Notice under Section 73 of the CGST Act:
Post-filing of the writ petition, the respondents issued a Show Cause Notice dated 25.03.2022 under Section 73 of the CGST Act, proposing a demand identical to the blocked ITC amount. The notice failed to disclose any specific reasons for the demand, merely reproducing statutory provisions mechanically. The court found that the notice did not provide any effective reasons for raising a demand and was issued in a mechanical manner, contrary to the provisions of the Act and Rules. The court referenced a previous decision (M/s Parity Infotech Solutions Pvt. Ltd. v. Government of National Capital Territory of Delhi & Ors.) to emphasize that a show cause notice must be issued based on specific reasons and not mechanically.

3. Claim for Interest on Blocked ITC:
The petitioner also claimed interest at 12% per annum on the blocked ITC. The court noted that there is no statutory provision for granting interest for the period when the ITC is blocked. Given the controversy raised by the respondents regarding the petitioner's stock position and DVAT returns, the court did not find it appropriate to entertain the claim for interest.

Judgment:
The impugned show cause notice was set aside for failing to disclose any reason for proposing the recovery, making it incapable of eliciting any meaningful response. However, the respondents are not precluded from taking any steps permissible by law. The petitioner's claim for interest was not entertained, and the petition was disposed of accordingly. All pending applications also stood disposed of.

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