Rule 86A upheld to block input tax credit traced to fake suppliers; restraint pending assessment under Sections 73, 74, 122

The HC dismissed the writ petition, upholding the use of Rule 86A to block electronic input tax credit where ITC was traced to fake or non-existent suppliers. The Court found no material showing a blanket direction to block credits without verification, held the initial reasons (though terse on the GST portal) and subsequent elaboration met natural-justice requirements, and noted that blocking is not recovery but a restraint pending assessment/penalty under Sections 73/74/122. The Court criticized portal space constraints for recording reasons and disagreed with contrary views of other High Courts.

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Issues Involved:

1. Legitimacy of blocking the electronic credit ledger under Rule 86A of the Central Goods & Services Tax Rules, 2017.
2. Interpretation of the term "availed" in the context of input tax credit.
3. Requirement of authorization and delegation of power under Rule 86A.
4. Adequacy of reasons provided for blocking the input tax credit.
5. Jurisdictional challenges regarding the exercise of power by the Assistant Commissioner.

Issue-wise Detailed Analysis:

1. Legitimacy of Blocking the Electronic Credit Ledger:

The petitioner challenged the blocking of their electronic credit ledger by the 2nd respondent, arguing that Rule 86A of the Rules, 2017, permits blocking of credit only if it is actually available in the ledger. The petitioner contended that no credit was available at the time of the blocking order. The court examined Rule 86A, which allows the Commissioner or an authorized officer to block credit if it is fraudulently availed or ineligible. The court noted that the rule does not restrict blocking to credit that is currently available in the ledger but applies to credit wrongfully utilized, regardless of its availability at the time of blocking. The court aligned with the interpretation by the High Courts of Allahabad and Calcutta, rejecting the petitioner's argument.

2. Interpretation of the Term "Availed":

The petitioner argued that "availed" means credit taken in monthly returns and credited to the ledger, which may not be utilized immediately. The court interpreted Rule 86A to mean that the rule comes into play when credit is availed fraudulently or ineligible, irrespective of its utilization status. The court emphasized that the term "such credit" in Rule 86A refers to credit created wrongfully, not necessarily available at the time of blockage.

3. Requirement of Authorization and Delegation of Power:

The petitioner contended that the 2nd respondent lacked proper authorization from the Commissioner to invoke Rule 86A. The court found that the delegation of power to the Assistant Commissioner for specific divisions was valid, as per the special All India Drive against fake registrations. The court rejected the petitioner's claim of improper delegation, noting that the authorization was in compliance with the rule's requirements.

4. Adequacy of Reasons Provided for Blocking ITC:

The petitioner argued that the blocking order lacked sufficient reasons, merely stating that credit from fake persons was utilized. The court acknowledged that the initial communication was brief but noted that subsequent communications provided detailed reasons. The court held that the initial cryptic explanation, followed by detailed reasons, satisfied the principles of natural justice. The court highlighted the need for the GST portal to allow more detailed explanations to avoid such issues.

5. Jurisdictional Challenges Regarding Exercise of Power:

The petitioner claimed that the 2nd respondent acted solely on the Commissioner's directions without independent application of mind. The court found no evidence supporting this claim, noting that the instructions were to verify and act based on findings, not to block credit indiscriminately. The court concluded that the 2nd respondent's actions were within jurisdiction and supported by proper authorization.

Conclusion:

The court dismissed the writ petition, finding no merit in the petitioner's arguments. The court upheld the blocking of the electronic credit ledger under Rule 86A, interpreting the rule to apply to wrongfully utilized credit, irrespective of its availability at the time of blocking. The court emphasized the need for detailed reasoning in administrative actions and the importance of proper authorization and delegation of power.

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