2024 (11) TMI 1463 - HC - GST

Taxpayers Protected: Rule 86A Cannot Arbitrarily Block Electronic Credit Ledger Beyond Existing Balance

HC ruled that Rule 86A of CGST Rules cannot lead to negative blocking of Electronic Credit Ledger (ECL). The court held that blocking ITC credits must be ... Attachment of the bank accounts of the petitioner in terms of Section 83 of the Central Goods and Services Tax Act, 2017 - blocking of Electronic Credit Ledger (ECL) in purported exercise of powers conferred by Rule 86A of the Central Goods and Services Tax Rules, 2017 - HELD THAT:- It is apparent that for the purposes of securing an amount of INR 1.87 crores, the respondents sought to invoke the powers conferred by Rule 86A even though it would lead to a negative balance in the ECL. The principles which had been enunciated by the Court in Best Crop Science (P) Ltd. vs. Commr [2024 (9) TMI 1543 - DELHI HIGH COURT] is that 'Rule 86A(1) of the Rules does not contemplate an order, the effect of which is to require a taxpayer to replenish his ECL with valid availment of ITC, to the extent of ITC used in the past, which the Commissioner or an officer authorized by him has reasons to believe, was fraudulently availed or was ineligible. Such an interpretation would in effect amount to construe an Order under Rule 86A(1) of the Rules as an order for recovery of tax. This is obvious because the taxpayer would now have to incur a larger cash outflow for payment of taxes as he would be denied utilization of validly availed ITC, which he would require to accumulate to compensate for the ITC availed and utilized which the Commissioner or an officer authorized by him, has reasons to believe was fraudulently availed or was ineligible.' Insofar as the issue of negative blocking of the ECL is concerned, it is unable unable to sustain the action impugned - the impugned order insofar as it imposes a blocking of the ECL of the writ petitioner is set aside - petition diposed off. 1. ISSUES PRESENTED and CONSIDEREDThe primary legal issues considered by the Court are:Whether the respondents were justified in blocking the Electronic Credit Ledger (ECL) of the petitioner under Rule 86A of the Central Goods and Services Tax Rules, 2017, particularly when such blocking resulted in a negative balance in the ECL (referred to as 'negative blocking').The scope and limits of the powers conferred under Rule 86A of the CGST Rules, 2017, especially regarding the necessity and legality of blocking ITC credits beyond the available balance in the ECL.The procedural and substantive safeguards applicable to the blocking of ITC credits under Rule 86A, including whether such blocking amounts to a recovery of tax or a protective measure.The relationship between the blocking of ITC credits under Rule 86A and the provisional attachment of bank accounts under Section 83 of the CGST Act, 2017, and whether the petitioner's challenge to the latter is maintainable at this stage.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legality and Scope of Blocking ECL Leading to Negative BalanceRelevant Legal Framework and Precedents: The Court primarily relied on Rule 86A of the Central Goods and Services Tax Rules, 2017, which empowers the Commissioner or an authorized officer to block the Electronic Credit Ledger (ECL) if there are reasons to believe that the Input Tax Credit (ITC) has been fraudulently availed or is ineligible. The Court extensively referred to the precedent set in Best Crop Science (P) Ltd. vs. Commr., which clarified the nature and limits of Rule 86A.Court's Interpretation and Reasoning: The Court emphasized that Rule 86A is an emergent provision designed to temporarily withhold ITC credits to protect government revenue. It does not require prior show cause notice and is not a machinery provision for tax recovery or assessment. The Court noted that while the blocking of ITC credits is permissible when there is a reason to believe fraud or ineligibility, such blocking must be limited to the available balance in the ECL at the time of the order.The Court explicitly rejected the concept of 'negative blocking,' i.e., blocking ITC credits beyond the available balance in the ECL, because such an interpretation would effectively convert Rule 86A into a recovery mechanism. This would impose an unfair burden on the taxpayer by requiring them to replenish the ECL with valid ITC to compensate for the amounts allegedly fraudulently availed, thereby increasing cash outflows unjustifiably.Key Evidence and Findings: The petitioner produced an order dated 08 October 2024 and a screenshot of the ECL ledger showing a negative balance post-blocking. This demonstrated that the respondents had blocked ITC credits exceeding the available balance, which formed the basis of the petitioner's challenge.Application of Law to Facts: Applying the legal principles from Best Crop Science, the Court found that the respondents' action of blocking the ECL to a negative balance was beyond the scope of Rule 86A. The order blocking ITC credits in excess of the existing balance was therefore unlawful.Treatment of Competing Arguments: The respondents did not contest the provisional attachment of bank accounts, and the Court accordingly refrained from adjudicating on that aspect. The focus was strictly on the legality of the negative blocking of the ECL. The respondents' exercise of power under Rule 86A was scrutinized in light of statutory limits and judicial precedent, leading to the conclusion that negative blocking was impermissible.Conclusions: The Court concluded that the impugned order blocking the ECL beyond the available ITC balance (negative blocking) was unsustainable and liable to be quashed.Issue 2: Relationship Between Rule 86A Blocking and Provisional Attachment Under Section 83Relevant Legal Framework and Precedents: Section 83 of the CGST Act allows provisional attachment of property, including bank accounts, to protect government revenue pending determination of tax dues. Rule 86A allows blocking of ITC credits as a protective measure but is distinct from attachment proceedings.Court's Interpretation and Reasoning: The Court noted that Rule 86A is not a substitute for or part of the machinery provisions for tax assessment and recovery under the CGST Act. Instead, it is an emergent protective measure. Section 83 proceedings involve provisional attachment and require a separate process.Key Evidence and Findings: The petitioner expressly chose not to challenge the provisional attachment of bank accounts at this stage, limiting the Court's consideration to the blocking of the ECL under Rule 86A.Application of Law to Facts: Given the petitioner's stance, the Court did not adjudicate on the attachment under Section 83 but clarified that Rule 86A and Section 83 are distinct mechanisms with separate procedural and substantive requirements.Treatment of Competing Arguments: No arguments were advanced on the attachment issue; hence, the Court did not consider it.Conclusions: The Court confined its ruling to the negative blocking issue, leaving the attachment issue open for future adjudication.3. SIGNIFICANT HOLDINGSThe Court held:'Rule 86A of the Rules is not a machinery provision for recovery of tax or dues under the CGST Act. It is not a part of the scheme of the machinery provisions for assessment and determination of the tax and dues as payable under the CGST Act. It is an emergent measure for protection of revenue by temporarily not allowing debit of available ITC in the ECL, which the Commissioner or an officer authorized by him has reasons to believe has been wrongfully availed.''Rule 86A(1) of the Rules does not contemplate an order, the effect of which is to require a taxpayer to replenish his ECL with valid availment of ITC, to the extent of ITC used in the past, which the Commissioner or an officer authorized by him has reasons to believe, was fraudulently availed or was ineligible. Such an interpretation would in effect amount to construe an Order under Rule 86A(1) of the Rules as an order for recovery of tax.''The impugned orders are set aside to the extent they disallow debit from the respective ECL of the petitioners, in excess of the ITC available in the ECL at the time of passing the impugned orders (referred to as Negative blocking).'Core principles established include:Rule 86A is a temporary, emergent, and protective provision, not a tax recovery mechanism.Blocking of the ECL must be limited to the ITC balance available at the time of the order; negative blocking is impermissible.The Commissioner must proceed under Sections 73 and 74 of the CGST Act for determination and recovery of wrongly availed ITC.Provisional attachment under Section 83 is a separate remedy and was not challenged in this proceeding.Final determinations:The writ petition was partly allowed.The impugned order blocking the ECL to a negative balance was quashed.The respondents were directed to lift the negative blocking forthwith.