Tax Authorities Improperly Blocked Input Tax Credit Without Written Notice, Must Follow Rule 86A Procedural Requirements

HC ruled that blocking of Input Tax Credit (ITC) was improper due to lack of written communication as mandated by Rule 86A of TNGST Rules. The court directed removal of the ITC block of Rs. 9,90,126 and allowed respondents to initiate fresh action with proper written communication to the assessee. No costs were awarded in this tax dispute resolution.

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Issues:
The issues involved in this case are the blocking of Input Tax Credit (ITC) by the second respondent and the petitioner seeking a direction to raise the block on ITC.

Blocking of ITC:
The petitioner sought a direction to remove the block on ITC amounting to Rs. 9,90,126, which was blocked by the second respondent through a text message on 11.12.2023. The petitioner contended that the block was in contravention of Rule 86A of the Tamil Nadu Goods and Services Tax Rules, 2017 (TNGST Rules).

Rule 86A of TNGST Rules:
The matter revolved around Rule 86A of the TNGST Rules, which outlines the conditions for the use of the amount available in the electronic credit ledger. The Rule empowers the Commissioner or an authorized officer to block the debit of an amount equivalent to the credit in the electronic credit ledger under certain circumstances, including fraudulent availing of input tax credit or ineligibility of the registered person for such credit.

Contestation and Decision:
The Government Advocate argued that a show cause notice was issued to the petitioner subsequently, and the petitioner had already submitted an explanation before receiving the notice. The advocate contended that allowing the petitioner to utilize the ITC at that stage would cause revenue loss. However, the Court held that Rule 86A requires the contemporaneous communication of reasons in writing to the assessee, which was not done in this case. Therefore, the Court directed the first respondent to remove the block on the ITC in the electronic credit ledger of the assessee, while allowing the respondents to initiate fresh action under Rule 86A in compliance with its terms. No costs were awarded in this regard.

Conclusion:
The Court disposed of the writ petition by ordering the removal of the block on the Input Tax Credit in the electronic credit ledger, emphasizing the importance of complying with Rule 86A and providing written reasons to the assessee in such cases.

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