2025 (11) TMI 359 - HC - GST

Rule 86A requires written, recorded reasons grounded in material and application of mind before blocking electronic credit ledgers

M/s Pilcon Infrastructure Pvt. Ltd. Versus State of U.P. and Another

HC held that Rule 86A requires the authority to record its 'reasons to believe' in writing before blocking ITC, and respondent failed to satisfy that ... Unblocking of Input Tax Credit (ITC) available in the Electronic Credit Ledger (ECL) of the petitioner - 'reasons to believe' required to be 'recorded in writing' under Rule 86A of the U.P.G.S.T. Rules 2017 - HELD THAT:- Primarily, no 'reason to believe' has been 'recorded in writing' by respondent no.2, to block the ITC of the petitioner. Once the Rule requires 'reasons to believe' to be 'recorded in writing', the jurisdiction and authority to be exercised under Rule 86A of the Rules must subscribe to that mandatory condition. Though such reasons may be recorded ex-parte against the assessee, at the same time, the requirement of the statute to record the reasons is a non-negotiable condition. It is wholly mandatory. As to what constitutes 'reason to believe' is not a matter of speculation, especially in this branch of law. As to the material that may give rise to a 'reason to believe' that any part of the turnover of an assessee escaped assessment to tax, the Supreme Court in the case of State of Uttar Pradesh And Others Vs. Aryaverth Chawal Udyog & Others [2014 (11) TMI 1095 - SUPREME COURT[ has observed that 'In case of there being a change of opinion, there must necessarily be a nexus that requires to be established between the 'change of opinion' and the material present before the assessing authority. Discovery of an inadvertent mistake or non-application of mind during assessment would not be a justified ground to reinitiate proceedings under Section 21(1) of the Act on the basis of change in subjective opinion.' When the Rules require recording of 'reasons to believe', 'in writing', there must not only exist material that may give rise to the belief necessary to be recorded by respondent.2 but that the reasons must spring from material on record/leading to the belief. It necessarily involves application of mind by the competent authority, here respondent no.2, to the facts brought before it - Even though exercise of power under Rule 86A(1) of the Rules remained ex-parte to the assessee, yet, more especially for that reason, the requirement of the statute to first record 'reasons to believe', 'in writing' must be strictly enforced on the revenue authorities. It may not forgotten, granting ITC and maintaining its chain is the soul of a successful GST regime. Therefore, any doubt or suspicion alone may not lead an action by the authorities to block the ITC of the assessee and disrupt the entire value addition chain and consequentially tax payments without fulfulling statutory tax requirements, without fulfilling the mandatory requirement of law - to record 'reasons to believe', 'in writing'. The action taken by the respondent no.2, to block the petitioner's ITC vide e-mail communication dated 24.07.2025, is set aside - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether blocking of Input Tax Credit (ITC) under Rule 86A(1) of the U.P.G.S.T. Rules, 2017 is valid where 'reasons to believe' have not been recorded in writing by the competent officer. 2. Whether a generic/intimation communication from an investigative agency (DGGI) or a terse entry in the Electronic Credit Ledger stating 'Supplier found non-functioning' satisfies the statutory requirement of recording 'reasons to believe' in writing under Rule 86A(1). 3. Whether Rule 86A(1) mandates any prior hearing before blocking ITC, or whether procedural safeguards thereafter (e.g., representation under Rule 86A(2)) suffice. 4. What is the legal standard and permissible material for forming a 'reason to believe' under Rule 86A(1), and the consequence if that standard is not met. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Mandatory recording in writing of 'reasons to believe' under Rule 86A(1) Legal framework: Rule 86A(1) requires that reasons to believe must be 'recorded in writing' by the officer empowered to block ITC before exercising the power to block. Precedent treatment: The Court relied on established principles reflected in prior decisions interpreting 'reason to believe' as requiring a rational basis germane to the action; it cited earlier authority emphasizing that existence of belief (not sufficiency of reasons) is justiciable and that the belief must be held in good faith. Interpretation and reasoning: The statutory requirement to record reasons in writing is mandatory and non-negotiable. That requirement entails an application of mind by the competent authority to material on record; mere technical entries or automated/e-mail communications without a discernible written rationale do not meet the statutory standard. Ratio vs. Obiter: Ratio - the Court held as a legal rule that blocking ITC under Rule 86A(1) without recording written reasons is without jurisdiction and illegal. Obiter - observations on the broader policy importance of ITC to the GST chain reinforce the mandatory character but serve as contextual guidance. Conclusion: Blocking ITC absent written reasons recorded by the empowered officer is unauthorized; such action must be set aside and ITC unblocked until the statutory procedure is complied with. Issue 2 - Sufficiency of investigative agency communication and ledger notation as 'reasons to believe' Legal framework: The authority exercising Rule 86A(1) must base its written reasons on material that establishes a nexus between the material and the belief that justifies blocking ITC; material must not be arbitrary, vague, or irrelevant. Precedent treatment: The Court applied decisions holding that material must not be arbitrary or irrelevant and that a change of opinion requires nexus with material on record; discovery of inadvertent error or mere suspicion is insufficient. Interpretation and reasoning: A generic communication from an investigative agency alleging that a supplier was 'non-operational' or had passed fraudulent ITC is investigative and ex parte as to the recipient; such a communication alone, without application of mind by the blocking authority recorded in writing, does not amount to reasons required by Rule 86A(1). A terse ledger entry ('Supplier found non-functioning') that lacks analysis or specifics does not disclose the requisite rationale or nexus to the petitioner's transactions. Ratio vs. Obiter: Ratio - the Court concluded that reliance solely on generic investigative intimation or ledger notation does not satisfy the statutory requirement; the blocking authority must record reasons that spring from material and indicate application of mind. Obiter - remarks on the ex parte nature of investigations and risks to the GST chain underscore caution but are ancillary. Conclusion: The DGGI intimation and the ledger remark were insufficient to constitute the written 'reasons to believe' mandated by Rule 86A(1); they cannot validate the blocking action in absence of a reasoned order by the competent officer. Issue 3 - Requirement of prior hearing versus post-blocking representation Legal framework: Rule 86A does not expressly require prior hearing before blocking ITC; it provides for administrative action and subsequent representations under Rule 86A(2). Precedent treatment: The Court acknowledged the statutory scheme permitting ex parte action but reiterated that procedural lacunae in recording reasons cannot be cured by absence of prior hearing. Interpretation and reasoning: Even where the statutory power is exercisable ex parte, the mandatory precondition of recording written reasons remains. The absence of prior hearing does not relieve the authority of the duty to document the rationale; given the potential disruption to the ITC chain, strict compliance is necessary. Post hoc opportunity to represent does not validate the initial exercise if the mandated reasons were not recorded. Ratio vs. Obiter: Ratio - lack of requirement for prior hearing does not obviate the statutory obligation to record reasons in writing; failure to do so renders the action invalid. Obiter - discussion of policy balance between investigation and taxpayer rights provides explanatory context. Conclusion: No prior hearing is mandated, but the authority must still record written reasons when blocking ITC; representations after blocking do not cure the absence of such reasons. Issue 4 - Consequences and remedial direction where Rule 86A(1) compliance is absent Legal framework: Actions taken without satisfaction of mandatory statutory preconditions are without jurisdiction and liable to be set aside; the authority may re-act if it follows statutory procedure. Precedent treatment: The Court applied the principle that sufficiency of reasons is not ordinarily justiciable, but existence of recorded belief and good faith are; absence of recorded reasons is reviewable and vitiates the action. Interpretation and reasoning: Because written reasons were not recorded and the material relied upon was generic and ex parte, the blocking order lacked jurisdictional foundation. The appropriate remedy is to set aside the blocking, direct immediate unblocking of ITC blocked through technical measures, and permit the authority to act afresh strictly in accordance with Rule 86A(1) should it choose to do so. Ratio vs. Obiter: Ratio - the Court ordered unblocking and made clear that future action is permissible only if the authority records reasons in writing and applies its mind to relevant material. Obiter - policy observations on the centrality of ITC in the GST regime inform the Court's insistence on strict compliance. Conclusion: The blocking action was set aside and ITC directed to be unblocked forthwith; the revenue authority remains free to act but only after complying with the statutory requirement to record written reasons and applying its mind to relevant material.