2025 (4) TMI 1013 - HC - GST

Tax Authorities Must Provide Fair Hearing and Carefully Review Evidence Before Blocking Input Tax Credit Claims

P Murugan S/o. Pazhani, Proprietor of Aarupadai and Co. Versus The Commercial Tax Officer, The State Tax Officer, Kancheepuram.

P Murugan S/o. Pazhani, Proprietor of Aarupadai and Co. Versus The Commercial Tax Officer, The State Tax Officer, Kancheepuram. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:Whether the issuance of show cause notices under Rule 100(2) and 142(1)(a) of the CGST Act, alleging receipt of inward supplies from non-existent taxpayers and consequent blocking of Input Tax Credit (ITC), was justified.Whether the petitioner's claim that the inward supplies were bona fide and not based on fake invoices could be adjudicated in writ proceedings.Whether the petitioner was entitled to immediate relief in the form of unblocking of the negatively blocked Input Tax Credit pending the final adjudication of the show cause notices.The procedural fairness in terms of affording the petitioner an opportunity of personal hearing before passing any final orders on the show cause notices.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legitimacy of Show Cause Notices under CGST Act and Blocking of Input Tax CreditRelevant Legal Framework and Precedents: The show cause notices were issued under Rule 100(2) and 142(1)(a) of the Central Goods and Services Tax (CGST) Act, 2017. Rule 100(2) pertains to blocking of Input Tax Credit where the supplier is found to be non-existent or involved in issuance of fake invoices, while Rule 142(1)(a) empowers the tax authorities to issue show cause notices for recovery of tax and penalties. The law mandates that input tax credit can be denied or blocked if the recipient is found to have availed credit on invoices issued by non-existent or fake suppliers.Court's Interpretation and Reasoning: The Court observed that the issuance of the show cause notices was based on allegations that the petitioner had availed ITC on inward supplies from non-existent taxpayers issuing fake invoices. The respondents had blocked the ITC accordingly. However, the Court noted that these are factual issues requiring detailed investigation and cannot be conclusively decided in writ jurisdiction at this stage.Key Evidence and Findings: The petitioner submitted replies to the show cause notices along with documentary evidence asserting that the inward supplies were genuine and invoices were disclosed in GSTR-1 returns. The respondents contended that the petitioner's dealings were with fake invoices, justifying the blocking of ITC.Application of Law to Facts: The Court emphasized that the determination of whether the invoices were fake or genuine is a factual inquiry best suited to be adjudicated by the tax authorities after considering the petitioner's submissions and evidence. The writ jurisdiction is not the appropriate forum for such fact-intensive disputes.Treatment of Competing Arguments: The petitioner argued for immediate unblocking of ITC as the transactions were bonafide, while the respondents maintained that the blocking was justified due to suspected fake invoices. The Court balanced these positions by recognizing the petitioner's right to be heard and the necessity for due process before finalizing the decision.Conclusions: The Court held that the challenge to the show cause notices was premature and that the factual issues raised could not be adjudicated in writ proceedings. The respondents must consider the petitioner's reply and evidence before passing any final orders.Issue 2: Right to Personal Hearing and Procedural FairnessRelevant Legal Framework and Precedents: Principles of natural justice require that before adverse action is taken, the affected party must be given an opportunity of hearing. Under the CGST Act and Rules, personal hearing is a mandatory procedural safeguard before passing orders on show cause notices.Court's Interpretation and Reasoning: The Court noted that the petitioner had submitted replies but there was no indication that a personal hearing had been afforded. The Court underscored the importance of affording a clear opportunity for personal hearing to the petitioner before any final decision is taken on the show cause notices.Key Evidence and Findings: The record showed that the show cause notices were issued and replies filed, but no personal hearing date had been fixed or communicated.Application of Law to Facts: The Court directed the respondents to issue a clear notice fixing a date for personal hearing within seven days and to consider the petitioner's submissions in light of the hearing.Treatment of Competing Arguments: No contestation was raised regarding the entitlement to personal hearing; the respondents agreed to comply with the Court's directions.Conclusions: The Court mandated that the respondents provide the petitioner with a personal hearing opportunity as a prerequisite to passing any final orders.Issue 3: Entitlement to Immediate Unblocking of Input Tax CreditRelevant Legal Framework and Precedents: Blocking of ITC is a protective measure pending investigation. However, if the tax authorities conclude that the petitioner's case does not involve fake invoices, the ITC should be unblocked as per law.Court's Interpretation and Reasoning: The Court recognized the petitioner's hardship caused by the blocking of ITC, which hampered business operations. However, it held that unblocking can only be ordered after the respondents conclude their inquiry and find no wrongdoing.Key Evidence and Findings: The petitioner's submission of documentary evidence and disclosure of invoices in returns was noted. The respondents were directed to consider these materials carefully.Application of Law to Facts: The Court directed that if the respondents conclude, after hearing and consideration, that the petitioner's ITC was not availed on fake invoices, the blocked ITC should be restored promptly.Treatment of Competing Arguments: The petitioner sought immediate relief, while the respondents sought to complete the inquiry first. The Court balanced these by ordering expeditious consideration within a fixed timeframe.Conclusions: The Court refused to grant immediate unblocking but directed that the respondents complete the inquiry and unblock ITC if no fake invoices are found.3. SIGNIFICANT HOLDINGSThe Court emphasized the following principles and made key determinations:'The challenge to the show cause notices in Form DRC-01 dated 18.12.2024 is premature' as the factual issues involved cannot be decided in writ proceedings.'Since the petitioner had already submitted his reply along with documentary evidence to the said show cause notices, the respondents may consider the same and pass appropriate orders in accordance with law.'The respondents were directed to 'issue a 7 days clear notice by fixing the date for personal hearing to the petitioner' to ensure procedural fairness.'If the respondent-Authority comes to the conclusion that the petitioner's case is not pertaining to fake invoices, the respondents are directed to consider the request of the petitioner, for unblocking of Input Tax Credit.'