2025 (8) TMI 1124 - HC - GST

Cryptic, non-speaking notice and order set aside; Electronic Credit Ledger unblocked, petitioner to keep 10% balance - Article 226 relief

The Lead Factory Versus The Assistant Commissioner of Commercial Taxes (Local Goods And Services Tax Office - 027), Bengaluru, The State of Karnataka, The Union of India.

The Lead Factory Versus The Assistant Commissioner of Commercial Taxes (Local Goods And Services Tax Office - 027), Bengaluru, The State of Karnataka, The ... ISSUES PRESENTED AND CONSIDERED 1. Whether an order under Rule 86A blocking debit from the Electronic Credit Ledger (ECL) is valid where the authority has not recorded independent 'reasons to believe' and has acted on communication/borrowed satisfaction from another officer. 2. Whether the impugned notice/endorsement and blocking order satisfy the statutory/constitutional requirements of reasoned recording and principles of natural justice (Article 14 and Article 19(1)(g) contentions raised but limited to reasoned order and hearing). 3. Whether availability of an alternative statutory remedy by appeal under Section 107 (requiring pre-deposit) bars exercise of writ jurisdiction under Article 226 when the impugned order is cryptic, non-speaking and violative of mandatory preconditions. 4. What interim or consequential relief is appropriate where an ECL has been blocked in breach of the requirements of Rule 86A and related principles (including conditions for unblocking pending further lawful action). ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of blocking ECL under Rule 86A when based on borrowed satisfaction Legal framework: Rule 86A (CGST/SGST Rules) empowers the Commissioner or an officer (not below Assistant Commissioner) who 'has reasons to believe' that ITC in the ECL has been fraudulently availed or is ineligible, to disallow debit of an equivalent amount; reasons must be recorded in writing. The CBIC circular (2 Nov 2021) explains permissible grounds and requires formation of opinion based on material and proper application of mind. Precedent treatment: The Division Bench in K-9 Enterprises (followed and applied here) held that the officer must form independent satisfaction based on tangible material and not act on borrowed satisfaction; the power is draconian and requires objective material and recording of reasons. Prior authorities (Radha Krishan, Xiaomi, Indian Minerals) emphasise formation of opinion, necessity and proportionality when exercising draconian fiscal powers. Interpretation and reasoning: The Court applied K-9's principles to the impugned notice and order and found absence of any independent analysis or recorded reasons demonstrating why Rule 86A conditions were satisfied. The impugned instruments merely recited external communication that a supplier was 'non-existent' and relied on another officer's field visit/cancellation proceedings without linking that material to the present taxpayer's entitlement to ITC. The Court emphasised that mere direction or investigation report cannot substitute for the decision-maker's own reasons to believe; Rule 86A contemplates an objective formation of opinion grounded on material evidence and recorded in writing. Ratio vs. Obiter: Ratio - an order under Rule 86A is invalid if the authority acts on borrowed satisfaction without independent application of mind and without recording reasons based on tangible material; such exercise is arbitrary and vitiates Rule 86A. Observations about potential genuineness of historical transactions (e.g., closure post-transaction) are illustrative but ancillary. Conclusions: The Court concluded the impugned blocking order was legally infirm for lack of independent 'reasons to believe' and for being based on borrowed satisfaction; accordingly the order did not satisfy Rule 86A requirements and was set aside. Issue 2: Requirement of reasoned, speaking order and compliance with principles of natural justice Legal framework: Administrative orders affecting substantive rights (blocking ECL) must record reasons and permit objective review; extreme fiscal measures require strict compliance with statutory preconditions. Principles of natural justice require that state action be reasoned and not cryptic, laconic or non-speaking. Precedent treatment: K-9 (Division Bench) and cases cited (Radha Krishan, Xiaomi) stress that draconian fiscal powers must be exercised with strict adherence to preconditions and reasons; orders lacking cogent reasons have been quashed. The CBIC circular reiterates need for application of mind and recorded reasons. Interpretation and reasoning: The impugned notice/endorsement and order were held to be cryptic, laconic and non-speaking; they did not articulate why the listed factual material constituted 'reasons to believe' vis-à-vis the petitioner, nor did they reflect any assessment of whether the conditions in Rule 86A(1) were satisfied. The Court treated such deficiency as violative of the statutory scheme and of principles of natural justice because the taxpayer was deprived of a reasoned basis to respond and challenge. Ratio vs. Obiter: Ratio - requirement to record cogent reasons is mandatory for valid exercise of Rule 86A; failure to provide a speaking order that discloses the basis for belief renders the order vulnerable to quashing. Observations addressing Article 14 and Article 19(1)(g) labels were considered insofar as they related to reasoned decision-making rather than broad constitutional adjudication on those Articles. Conclusions: The Court held the impugned instruments violative of the requirement to record reasons and of natural justice and quashed them on that ground. Issue 3: Maintainability of writ despite alternative remedy of appeal under Section 107 requiring pre-deposit Legal framework: Existence of an alternative statutory remedy does not automatically preclude writ jurisdiction where the statutory remedy is inadequate or where the impugned order is tainted by illegality that demands immediate judicial interference; requirement of pre-deposit can make statutory remedy ineffectual in protecting rights. Precedent treatment: Authorities cited in the judgment underline that writ jurisdiction may be exercised when orders are cryptic, arbitrary or when compliance with statutory preconditions is missing; K-9 treated similar issues by entertaining writ despite availability of appeal. Interpretation and reasoning: The Court observed that the impugned order was procedurally and substantively defective (non-speaking, based on borrowed satisfaction). Requiring the petitioner to pursue an appeal with a 10% pre-deposit would impose an inequitable burden and possibly render relief nugatory. Given the draconian nature of blocking ECL and the absence of compliance with mandatory prerequisites, the Court found writ jurisdiction appropriate. Ratio vs. Obiter: Ratio - where an impugned order is tainted by a jurisdictional or procedural illegality (non-recording of reasons, borrowed satisfaction), writ relief is maintainable notwithstanding the availability of appeal that requires onerous pre-deposit. Observations on balancing equities and exigencies of pre-deposit are consequential to the relief granted. Conclusions: The Court refused to treat the availability of appeal as a bar to Article 226 jurisdiction in the facts of the case and proceeded to grant relief. Issue 4: Appropriate interim/consequential relief and conditions for unblocking Legal framework: When a writ court quashes an administrative order but permits the authority to revisit the matter, it may fashion interim directions balancing interests of revenue and taxpayer, including conditions to prevent prejudice to revenue. Precedent treatment: The judgment applies principles from earlier cases on provisional attachment and interim measures (Radha Krishan, Xiaomi), emphasising proportionality and necessity. Interpretation and reasoning: To balance equities (respondent's interest in revenue recovery and petitioner's right to utilize ITC), the Court ordered immediate unblocking of the ECL but granted respondents liberty to issue a fresh notice and proceed in accordance with law within one month. Simultaneously, the Court required the petitioner to maintain 10% of the tax demand balance in the ECL as a protective measure akin to the pre-deposit mechanism in Section 107, thereby preserving revenue interest while remedying the illegality. Ratio vs. Obiter: Ratio - where an ECL is unlawfully blocked, the Court may direct immediate unblocking while preserving the revenue's right to re-examine and proceed lawfully; conditioning unblocking upon maintenance of a reasonable percentage of the disputed amount is a legitimate balancing measure. Ancillary remarks about ongoing proceedings under Sections 73/74 are clarificatory. Conclusions: The Court set aside the impugned instruments, directed immediate unblocking subject to maintaining 10% of the claimed tax in the ECL, and permitted the authority to issue fresh notice and proceed lawfully within a stipulated time. Cross-references and final operative principles 1. Rule 86A demands independent formation of 'reasons to believe' based on tangible material, recorded in writing; reliance on communication from other officers without independent application of mind invalidates action under the Rule (see Issue 1 & Issue 2). 2. The draconian character of blocking ECL invokes strict compliance with statutory preconditions and the doctrine of proportionality; administrative powers must exhibit a proximate/live nexus between purpose and measure (Issues 1-2). 3. Writ jurisdiction is available where the impugned order is cryptic, non-speaking or otherwise tainted by jurisdictional illegality even if an appeal exists requiring pre-deposit; courts may grant interim relief balancing revenue protection and taxpayer rights, including conditioning unblocking on a suitable security/pre-deposit analogue (Issue 3-4).