2025 (12) TMI 681 - HC - GST

Continued ITC blocking u/r 86A beyond one year without fresh material held ultra vires and quashed

HC held that blocking of petitioner's ITC in the Electronic Credit Ledger under Rule 86A beyond the statutory period of one year, on the same grounds and ... Seeking unblocking of ITC lying in the Electronic Credit Ledger (ECL) of petitioner - blocking beyond the statutory period of one year - HELD THAT:- After considering its various earlier decisions in State of Odisha v. Satish Kumar Ishwardas Gajbhiye [2021 (10) TMI 1473 - SUPREME COURT], Rai Sahib Ram Jawaya Kapur v. State of Punjab [1955 (4) TMI 35 - SUPREME COURT], Lohia Machines Ltd. v. Union of India [1985 (1) TMI 1 - SUPREME COURT], Pt. Banarsi Das Bhanot v. State of Madhya Pradesh [1958 (4) TMI 48 - SUPREME COURT] and Sant Ram Sharma v. State of Rajasthan [1967 (8) TMI 117 - SUPREME COURT (LB)], Hon’ble the Supreme Court concluded that provisional attachment is a pre-emptive measure to protect interests of government revenue and, thus, cannot be employed as measure of recovery. Period of one year is sufficient for revenue to conclude its investigation. Under the garb of renewal, a provisional attachment order cannot continue with no change in circumstances. An act which cannot be done directly, cannot be done indirectly. Doubtlessly Hon’ble the Supreme Court was considering matters involving interpretation of Section 83 of 2017 Act. However, a bare perusal of Section 83 of 2017 Act and Rule 86A of 2017 Rules clearly indicate that basic principle behind both provisions is protection of revenue. Rule 83(2) and Rule 86A(3) are clearly pari materia. Rule 159 (5) and (6) of 2017 Rules confer powers upon the Commissioner to release the property from attachment when it is found that property attached was or is not liable to attachment as is the case under Rule 86A(2) of 2017 Rules. In the given factual matrix, blocking of ITC beyond period of one year on the same very ground, is clearly unsustainable. It is to be reiterated that as informed to the Court, no further proceedings have been initiated against petitioner and there is no other fresh ground on the basis of which blocking of ITC has been renewed. It is, thus, held that blocking of petitioner’s ITC by respondent after period of one year i.e. 21.11.2024 is unsustainable, hence, set aside. Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether input tax credit in the electronic credit ledger can be blocked or re-blocked under Rule 86A of the CGST/HGST Rules beyond the statutory period of one year on the same grounds. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Power to block / re-block ITC under Rule 86A beyond one year on the same grounds Legal framework 2.1 Rule 86A of the CGST/HGST Rules was extracted, particularly: (i) Sub-rule (1) - empowering the Commissioner or authorised officer, having 'reasons to believe' that ITC has been fraudulently availed or is ineligible in specified situations, to disallow debit of an equivalent amount in the electronic credit ledger. (ii) Sub-rule (2) - permitting lifting of such restriction once the conditions for disallowing debit no longer exist. (iii) Sub-rule (3) - providing that 'such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.' 2.2 Section 83 of the CGST/HGST Act was also reproduced, particularly sub-section (2), which provides that any provisional attachment 'shall cease to have effect after the expiry of a period of one year from the date of the order.' 2.3 The Court referred to and relied upon the Supreme Court's interpretation of Section 83 in the decision in Kesari Nandan Mobile, where the question considered was whether a second provisional attachment order under Section 83(1) can be issued after the initial attachment ceases by efflux of one year under Section 83(2). Interpretation and reasoning 2.4 The Court noted that Rule 86A(3) and Section 83(2) are pari materia in structure and purpose, both embodying a legislative policy that a coercive, pre-emptive measure to protect revenue ceases to have effect after one year. 2.5 Relying on the reasoning of the Supreme Court in construing Section 83, the Court emphasized: (i) Provisional attachment (under Section 83) is a draconian, pre-emptive power to protect revenue, not a measure of recovery. (ii) Sub-section (2) of Section 83 cannot be rendered otiose by permitting renewal or repeated re-attachment on substantially the same grounds after lapse of one year. (iii) The maxim 'an act which cannot be done directly cannot be done indirectly' applies; repeated orders in the guise of renewal, without change in circumstances, would be an abuse of law and contrary to legislative intent. (iv) One year is considered sufficient for the revenue to complete investigation; if the legislature intended renewal or extension, it would have so provided, as in other tax statutes. 2.6 The Court held that the same underlying principles apply to Rule 86A: (i) Both provisions are framed to protect government revenue through temporary, pre-emptive restraints. (ii) Rule 86A(3), like Section 83(2), contains an express time limit of one year after which the restriction ceases. (iii) Rule 159(5)-(6) and Rule 86A(2) both confer power to release attachment/blocking when grounds no longer subsist, reinforcing the temporary nature of such measures. 2.7 On facts, the Court observed that: (i) ITC was originally blocked on 21.11.2023 under Rule 86A on the ground that the supplier M/s M.S. Trading Company was non-existent/non-operational and had passed on ITC. (ii) Part of the ITC was later unblocked upon representation, but the balance remained blocked; subsequently, ITC was again blocked on 05.12.2023 for the same reason, i.e., investigation concerning the same supplier. (iii) It was specifically noted that no further proceedings had been initiated against the petitioner and no fresh or different ground was asserted for the renewed blocking. 2.8 Applying the above principles, the Court treated 'blocking of ITC beyond period of one year on the same very ground' as analogous to impermissible 'renewal' or re-issuance of a lapsed provisional attachment order, which the Supreme Court had disallowed under Section 83. Conclusions 2.9 The Court held that, in the absence of any fresh ground or changed circumstances, ITC blocked under Rule 86A cannot be continued or re-blocked beyond the statutory period of one year on the same grounds. 2.10 Blocking of the petitioner's ITC by the respondent after the expiry of one year from the initial blocking (i.e., after 21.11.2024) on the same basis was held to be unsustainable and was set aside. 2.11 The writ petition was allowed to the above extent, while reserving liberty to the authorities to take further steps against the petitioner strictly in accordance with law, and clarifying that no opinion was expressed on the merits of the underlying allegations concerning the supplier or the petitioner's ITC entitlement.