2025 (1) TMI 1600 - HC - GST

Rule 86A(1) cannot force taxpayers to replenish Electronic Credit Ledger for previously used ITC based on suspicion of fraud

M/s. Goodluck Enterprises Versus Union of India & Ors.

HC quashed and set aside the order of 11 March 2024 that blocked the petitioner's Electronic Credit Ledger resulting in negative ITC, and allowed the ... Blocking of the Electronic Credit Ledger (ECL) in terms of the orders impugned and which has resulted in a negative credit - HELD THAT:- In Best Crop Science [2024 (9) TMI 1543 - DELHI HIGH COURT], while dealing with an identical situation, has held 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.' The impugned order dated 11 March 2024 resulting in negative blocking of the ITC ledger of the writ petitioner is hereby quashed and set aside - petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an order under Rule 86A(1) of the CGST Rules may validly block debit from the Electronic Credit Ledger (ECL) in a manner that results in a negative credit (i.e., disallowing debit in excess of the ITC actually available in the ECL at the time of the order). 2. Whether Rule 86A(1) requires issuance of a prior show-cause notice or initiation of assessment/demand proceedings under Sections 73/74 of the CGST Act before it can be invoked. 3. The legal character of Rule 86A: whether it is a machinery/recovery provision under the CGST Act or an emergent protective measure for safeguarding revenue. 4. The temporal limits and review obligations under Rule 86A (including the effect of Sub-rules (2) and (3) and the requirement to lift the block if conditions no longer exist). 5. Appropriate relief where an impugned order results in negative blocking, and scope for administrative redress in relation to alleged illegal/coercive recovery. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of Negative Blocking under Rule 86A(1) Legal framework: Rule 86A(1) empowers the Commissioner or an officer authorized by him to withhold the use of Input Tax Credit (ITC) available in a taxpayer's ECL where the officer has reason to believe that the credit has been fraudulently availed or is ineligible. Sub-rule (3) limits the operative period of such an order to a maximum of one year. Sections 73/74 govern determination of tax, interest and penalty where ITC has been wrongly availed; Section 83(1) permits provisional attachment of property. Precedent treatment: The Court applied reasoning from a recent decision addressing an identical situation (Best Crop Science), following its analysis and conclusions concerning the scope and limits of Rule 86A. Interpretation and reasoning: Rule 86A is designed as an emergent, protective provision to temporarily prevent use of ITC suspected to be fraudulent or ineligible. It does not confer on the officer a power to effect recovery of tax by forcing a taxpayer to replenish the ECL to compensate for past utilisation; construing Rule 86A(1) to permit negative blocking (i.e., disallowing debits exceeding the ECL balance at the time of order) effectively converts a protective measure into a recovery mechanism and imposes an unwarranted cash flow burden. The proper scope is to withhold only such debits as can be directly matched to the ITC then available in the ECL; debiting beyond available balance is inconsistent with the text, purpose and protective character of the provision. Ratio vs. Obiter: Ratio - An order under Rule 86A(1) cannot validly disallow debit from the ECL in excess of the ITC available at the time of the order (negative blocking); such an effect transforms Rule 86A into a recovery provision, contrary to its emergent protective purpose. Conclusions: Orders resulting in negative blocking are unsustainable and liable to be set aside to the extent they disallow debit beyond the ECL balance at the time of the order. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Need for Prior Proceedings or Show-Cause under Rule 86A(1) Legal framework: Rule 86A(1) contains no express requirement for issuance of a prior show-cause notice or initiation of assessment/proceedings under Sections 73/74 before an order is passed; Sections 73/74 provide the substantive and procedural mechanism for determination of tax liability. Precedent treatment: The Court followed prior analysis that explicitly recognized Rule 86A(1) as an emergent measure which need not be preceded by initiation of assessment/demand proceedings. Interpretation and reasoning: Given the preventative and emergent nature of Rule 86A, immediate administrative action without prior show-cause is contemplated to protect revenue where the officer has reason to believe fraudulent or ineligible ITC has been availed. However, the provision is temporary and must be followed by proceedings under Sections 73/74 to determine any liability; Rule 86A itself does not replace the statutory scheme for assessment and recovery. Ratio vs. Obiter: Ratio - The impugned orders need not be preceded by show-cause or assessment proceedings; nonetheless, Rule 86A orders must be followed by determination under Sections 73/74 if liability is to be established and recovered. Conclusions: Prior proceedings are not a prerequisite for invoking Rule 86A(1), but the officer must thereafter pursue Sections 73/74 for determination of amounts due; Rule 86A is not a substitute for assessment/recovery proceedings. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Characterisation of Rule 86A as Protective, not a Machinery/Recovery Provision Legal framework: Distinction between emergent/protective measures (e.g., temporary withholding or provisional attachment under Section 83) and recovery/assessment machinery (Chapters XII, XIV, XV encompassing Sections 73/74). Precedent treatment: The Court adhered to the view in the considered precedent that Rule 86A is not part of the statutory machinery for recovery or assessment but is an interim mechanism to protect revenue. Interpretation and reasoning: Rule 86A's statutory language, temporal limitation, and placement indicate its function as a safeguard enabling immediate temporary restraint on utilization of suspect ITC. Construing it as a recovery provision would subvert the legislative channels for assessment, notice and opportunity to be heard, and impose disproportionate cash outflow obligations on taxpayers without adherence to statutory safeguards inherent in Sections 73/74. Ratio vs. Obiter: Ratio - Rule 86A must be construed as an emergent protective provision; it cannot be interpreted as creating an independent recovery mechanism. Conclusions: Rule 86A is properly used to temporarily block use of ITC where there is reason to believe of fraud or ineligibility, but subsequent substantive determination and recovery must proceed under the assessment provisions of the Act. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Temporal Limits and Duty to Restore Debits Legal framework: Sub-rule (2) of Rule 86A mandates permitting debit where the officer is satisfied conditions for disallowance no longer exist; Sub-rule (3) caps the operative period of an order under Rule 86A(1) at one year from the date of passing. Precedent treatment: The Court relied on the precedent's articulation that Rule 86A orders are temporary and subject to review and lapse. Interpretation and reasoning: The existence of express temporal limits and an obligation to restore debit when conditions cease indicates Parliament's intent that the measure be temporary and subject to administrative review. The officer must proactively lift the block once reasons to believe no longer subsist; prolonged blocking beyond statutory temporal limits is impermissible. Ratio vs. Obiter: Ratio - Sub-rule (2) imposes an enforceable duty to permit debit when the basis for blocking ceases; Sub-rule (3) imposes an absolute temporal cap of one year. Conclusions: Blocking under Rule 86A cannot continue beyond the statutory period and must be lifted if the conditions permitting disallowance no longer exist; orders must be limited to the ITC available at the time and monitored within the one-year maximum. ISSUE-WISE DETAILED ANALYSIS - Issue 5: Relief and Administrative Redress for Alleged Illegal Recovery Legal framework: Judicial review of administrative orders and directions for administrative reconsideration where coercive or illegal recovery is alleged; powers to quash or set aside orders and to direct fresh consideration in accordance with law. Precedent treatment: The Court applied the precedent's remedial approach by quashing the portion of the impugned order that effected negative blocking and by providing a route for administrative remedy in relation to alleged illegal recoveries. Interpretation and reasoning: Where a Rule 86A order effects negative blocking, the judicial remedy is to quash the order to the extent it disallowed debit beyond available ECL balance as of the order's date. Separate allegations of illegal or coerced recovery require administrative examination; judicial interference is justified to secure prompt corrective action but the appropriate mechanism is to direct representation to the competent authority for expeditious disposal in accordance with law within a specified timeframe. Ratio vs. Obiter: Ratio - Quashing of negative blocking is appropriate relief; administrative representations regarding alleged illegal recoveries should be examined and disposed of within a short, judicially-directed timeframe. Conclusions: The impugned order is quashed insofar as it resulted in negative blocking; the taxpayer is entitled to seek administrative redress for alleged illegal/ coercive recoveries and the competent authority must examine and dispose of such representation within a prescribed short period.