2024 (12) TMI 1121 - HC - GST

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 ... Blocking the electronic credit ledger under Rule 86A of the Central Goods & Services Tax Rules, 2017 - ITC was obtained from fake and non-existent suppliers - HELD THAT:- None of the proceedings and documents, produced by the petitioner, before this Court, makes out any such direction by the Commissioner, requiring the 2nd respondent to simply block ITC of the dealers, such as, the petitioner herein. The petitioner has produced a proceeding of the Joint Commissioner, in which the 2nd respondent was informed that the list of fake / suspicious units had been received and it is necessary to cause verification and blockage of recovery of inadmissible ITC. For this purpose, the 2nd respondent was directed to conduct a physical verification to be scheduled between 22.05.2024 to 29.05.2024. The direction, in these proceedings, was to ascertain facts and to take action accordingly. There is no direction to block, the credit ledger, without any exception. It may be noted that ITC of the petitioner was blocked in March, 2024 and this proceeding has no relevance. Accordingly this contention of the petitioner is also rejected. The petitioner’s contention that the power under Rule 86A has been invoked without giving any reasons and without looking into the past conduct of the petitioner also requires to be rejected. Though the initial communication, dated 20.03.2024, had given a cryptic description of the reason for blocking ITC, the fact remains that the ground on which such ITC has been blocked can be made out. However, further details have also been given subsequently. In such circumstances, the contention, that no cogent reasons are given, cannot be accepted. It may also be noticed that the blocking of ITC does not amount to recovery of tax, but only stops the use of ineligible ITC. In such cases, the supply of reasons, initially in a cryptic manner, in the order, and subsequent elaboration, of those reasons, meets the requirement of principles of natural justice. Rule 86A (1)(d) stipulates that the appropriate authority, after giving reasons to be recorded in writing, may disallow debit of an amount equivalent to such credit in the electronic credit ledger, either for discharge of any liability or for claim of any refund of an unused amount. The reasons, that need to be set out in the order of blockage, would have to indicate why the order of blockage is being issued. In the present case, the initial order carried only the basic ground - The reasons set out in the GST portal, barely pass muster. This appears to be a case where, technology, instead of assisting the cause of justice, is actually hindering it. It is time that the authorities took note of this fact, and made necessary changes to ensure that there is no space constraint, in the recording of reasons, passed in the GST portal. The scheme of this Rule is to put aside such amount of input tax credit, which has been wrongfully utilized, whether it is actually available in the credit ledger or not, and to await an appropriate order of assessment and penalty, if any, either under Section 73 or Section 74 of the GST Act, read with Section 122 of the GST Act. In view of this interpretation, we are unable, with all due respect, to agree with the view taken by the Hon’ble High Court of Gujarat or the Hon’ble High Court of Telangana. There are no merit in the present writ petition - petition dismissed. 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.