TaxTMI 
TaxTMI 
2025 (8) TMI 1124
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of India. (iii) This Hon'ble Court may be pleased to declare the provisions of Rule 86A of the CGST/SGST Rules, 2017 as being unreasonable, inasmuch as the said Rule does not incorporate the principles of natural justice and is therefore violative of Article 19(1)(g) of the Constitution of India. (iv) This Hon'ble Court may be pleased to read down the provisions of Rule 86A of the CGST/SGST Rules, 2017 so as to enable a Registered Person to show reasonable cause before action is taken under the Rule by an authorized officer. (v) This Hon'ble High Court may be pleased to issue such other writ or writs as this Hon'ble Court may deem it fit to grant in the facts and circumstances of the petitioner's case." 2. Heard learned counsel for the petitioner and learned AGA for respondent Nos. 1 and 2 and learned counsel for respondent No. 3 and perused the material on record. 3. In addition to reiterating the various contentions urged in the memorandum of petition and referring to the material on record, learned counsel for the petitioner invited my attention to the impugned order at Annexure - A dated 06.03.2025 in order to point out that apart from the fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 0 1714166 1714166 0 3428332 3. Jun-2024 B2B 42724150 0 3845174 3845174 0 7690348 4. MAY-2024 B2B 16889745 0 1520077 1520077 0 3040154 As per Rule 86A of the Central/State Goods and Services Tax Rules, 2017, the authority has requested to block the aforementioned ITC and initiate recovery proceedings. In this regard, you are required to either reverse the inadmissible ITC or submit a reply explaining why the ITC should not be restricted, within three days from the date of service of this endorsements." 6. The impugned order at Annexure - A dated 06.03.2025 reads as under: "GOVERNMENT OF KARNATAKA Department of Commercial Taxes Proceedings of the Assistant Commissioner of Commercial Taxes O/o. Local Goods and Services Tax Office-027. Present: SUSHMA.N, ACCT LGSTO-027 Preamble: According to Rule 86A introduced by the Central Government, Conditions of use of amount available in electronic credit ledger have been notified. Accordingly. (1) The Commissioner or an officer authorized by him in this behalf, not below the rank of an Assistant Commissioner,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AYAKA ENTERPRISES Dated: 23/10/2024 by issuing REG 19 issued quoting Section 29(2)(e)-registration obtained by means of fraud, wilful misstatement or suppression of facts as below: Reference No. ZA290824055720C GSTIN 29EBRPG0049F1ZJ Status REG 19 issued -Suo Moto cancelled Legal Name of Business GYANENDR SINGH CHAUHAN Date of Original Registration 01/01/2023 Reason for Cancellation Response By Tax Payer Tax payer is not traceable NA FORM GST REG-19 [SEE RULE 22(3) ] Reference No: ZA291024088507A Date:23/10/2024 To, GYANENDR SINGH CHAUHAN Plot No.26/2, Atibele, Bengaluru Bengaluru Urban, Karnataka - 562 107 GSTIN/UIN: 29EBRPG0049F1ZJ Application Reference Number (ARN): AA290824036198T Date: Order for Cancellation of Registration This has reference to show cause notice issued dated 13/08/2024 Whereas no reply to the show cause notice has been submitted; and whereas the undersigned based on record available with this office is of the opinion that your registration is liable to be cancelled for following reason(s) 1. Other Remarks: Section 29(2)(e)-registration obtained by means o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....c credit ledger. The second prerequisite is of recording the reasons in writing for invoking the powers under rule 86A of the Rules of 2017. Unless the aforesaid two pre-requisites are fulfilled, the competent authority cannot invoke the powers under rule 86A of the Rules of 2017 for the purpose of disallowing the debit of the determined amount to the electronic credit ledger or to block the electronic credit ledger even to the extent of amount fraudulently or wrongly availed by the petitioners/assessee." 9.1 However, the learned single judge [K-9-Enterprises v. State of Karnataka, (2025) 137 GSTR 426 (Karn).] came to the erroneous conclusion that the respondents-Revenue had fulfilled/satisfied the aforesaid twin/dual pre-requisites/requirements, viz., respondents had "reasons to believe" which were based on cogent material available with them to invoke rule 86A of the CGST Rules; in this context, the learned single judge1 failed to appreciate that the only "reason to believe" was alleged satisfaction of certain officers who conducted a field visit in Goa and noticed that the said suppliers were not in business. It is well-settled that the expression "reason to believe" wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....place declared in registration. (b) The credit is availed by the registered person on invoices or debit notes, without actually receiving any goods or services or both. (c) The credit is availed by the registered person on invoices or debit notes, the tax in respect of which has not been paid to the Government. (d) The registered person claiming the credit is found to be non-existent or is found not to be conducting any business from the place declared in registration. (e) The credit is availed by the registered person without having any invoice or debit note or any other valid document for it. 3.1.3 The Commissioner, or an officer authorised by him, not below the rank of Assistant Commissioner, must form an opinion for disallowing debit of an amount from electronic credit ledger in respect of a registered person, only after proper application of mind considering all the facts of the case, including the nature of prima facie fraudulently availed or ineligible input-tax credit and whether the same is covered under the grounds mentioned in sub-rule (1) of rule 86A, as discussed in paragraph 3.1.2 above; the amount of input-tax cre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....must form an opinion for disallowing debit of an amount from electronic credit ledger in respect of a registered person, only after proper application of mind considering all the facts of the case, including the nature of prima facie fraudulently availed or ineligible input-tax credit and whether the same is covered under the grounds mentioned in rule 86A(1). As stated earlier, rule 86A, which in effect is the power to block ECL is drastic in nature which creates a disability for the taxpayer to avail of the credit in ECL for discharge of his tax liability which he is otherwise entitled to avail and therefore, all the requirements of rule 86A would have to be fully complied with before the power thereunder is exercised; when this Rule requires arriving at a subjective satisfaction which is evident from the use of words, "must have reasons to believe", the satisfaction must be reached on the basis of some objective material available before the authority and cannot be made on the flights of ones fancies or whims or caprices. 9.5 In the instant case, the electronic credit ledgers have been blocked solely on the basis of communication from another officer (Field visit report ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....usal of the impugned orders, it is crystal clear that the order to block the ECL provisionally was out of the borrowed satisfaction of the respondent-authorities rather than based on any independent analysis. 9.8 As stated supra, the impugned order discloses that the same has been passed mechanically and is based on borrowed satisfaction and does not meet the test of formation of an opinion of the Assessing Officer who seems to have been influenced by the findings of the Investigation Wing (i.e., Field visit report by the Asst. State Tax Officer, Vasco-D-Gama, (Goa)) and have not independently formed an opinion on the likely additions to be made during assessment proceedings. In the light of existence of a legal mandatory pre-requirement and precondition of recording of formation of opinion which is in pari materia with "reasons to believe", it was incumbent upon the officer to arrive at his own satisfaction and not borrowed satisfaction by proper application of mind; the respondents have proceeded solely on the basis that the supplier has been found to be non-existent or not to be conducting any business from the place which it has obtained registration, has blocked the i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....shall be deemed to be concluded upon the person paying the tax with interest under section 50 and a penalty equivalent to 50 per cent. of the tax within thirty days of the communication of an order. These provisions indicate how sub-sections (5), (8) and (11) operate at different stages of the process. 49. Now in this backdrop, it becomes necessary to emphasise that before the Commissioner can levy a provisional attachment, there must be a formation of "the opinion" and that it is necessary "so to do" for the purpose of protecting the interest of the Government revenue. The power to levy a provisional attachment is draconian in nature. By the exercise of the power, a property belonging to the taxable person may be attached, including a bank account. The attachment is provisional and the statute has contemplated an attachment during the pendency of the proceedings under the stipulated statutory provisions noticed earlier. An attachment which is contemplated in section 83 is, in other words, at a stage which is anterior to the finalisation of an assessment or the raising of a demand. Conscious as the Legislature was of the draconian nature of the power and the serious conseq....
X X X X Extracts X X X X
X X X X Extracts X X X X
....died in the statute and the rules. The exercise of unguided discretion cannot be permissible because it will leave citizens and their legitimate business activities to the peril of arbitrary power. Each of these ingredients must be strictly applied before a provisional attachment on the property of an assessee can be levied. The Commissioner must be alive to the fact that such provisions are not intended to authorise Commissioners to make pre-emptive strikes on the property of the assessee, merely because property is available for being attached. There must be a valid formation of the opinion that a provisional attachment is necessary for the purpose of protecting the interest of the Government revenue. 51. These expressions in regard to both the purpose and necessity of provisional attachment implicate the doctrine of proportionality. Proportionality mandates the existence of a proximate or live link between the need for the attachment and the purpose which it is intended to secure. It also postulates the maintenance of a proportion between the nature and extent of the attachment and the purpose which is sought to be served by ordering it. Moreover, the words embodied in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase after the conclusion of the assessment/reassessment proceedings, if there is any tax liability, the Revenue may not be in a position to recover the amount thereafter, in such a case only, however, on formation of subjective satisfaction/opinion, the Commissioner may exercise the powers under section 45 of the VAT Act'." 52. It is evident from the facts noted above that the order of provisional attachment was passed before the proceedings against the appellant were initiated under section 74 of the HPGST Act. Section 83 of the Act requires that there must be pendency of proceedings under the relevant provisions mentioned above against the taxable person whose property is sought to be attached. We are unable to accept the contention of the respondent that merely because proceedings were pending/concluded against another taxable entity, that is, GM Powertech, the powers of section 83 could also be attracted against the appellant. This interpretation would be an expansion of a draconian power such as that contained in section 83, which must necessarily be interpreted restrictively. Given that there were no pending proceedings against the appellant, the mere fact that proce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assed while dealing with identical provisions under the CGST Act, 2017 and Rules made there under was followed by this court in the context of section 281B of the I.T. Act by this court in Indian Minerals Case [Indian Minerals and Granite Co. v. Deputy Commissioner of Income-tax, (2022) 440 ITR 292 (Karn); 2021 SCC OnLine Kar 15952.], wherein it was held as under (page 299 in 440 ITR): '8. As held by the apex court in the aforesaid decision, mere apprehension on the part of the respondents that huge tax demands are likely to be raised on completion of assessment is not sufficient for the purpose of passing a provisional order of attachment. It has also been held that apart from the fact that a writ petition under article 226 of the Constitution of India challenging the provisional attachment order was maintainable, having regard to the fact that the provisional attachment order of a property of a taxable person including the bank account of such person is draconian in nature and the conditions which are prescribed by the statute for the valid exercise of power must be strictly fulfilled, the exercise of power for order of provisional attachment must necessarily be preceded....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under section 153A of the said Act of 1961 have already been initiated coupled with the fact that section 281 of the said Act of 1961, contemplates that any alienation of any property belonging to the petitioners would be null and void, in addition to the specific assertion made by the petitioner that they own and possess immovable property to the tune of more than Rs. 300 crores, the said apprehension of the respondents is clearly unfounded and without any basis and consequently, the said apprehension of the respondents cannot be accepted'. 12. In the instant case, a perusal of the impugned order will clearly indicate that the same is arbitrary and reflects premeditated conclusion without recording either an opinion or necessary to attach the property; the doctrine of proportionality which is implicated in the purpose and necessity of provisional attachment mandates the existence of a proximate or a live link between the need for the attachment and the purpose which it is intended to secure. 13. Further, mere apprehension that huge tax demands are likely to be raised on completion of assessment is not sufficient for the purpose of passing a provisional attachmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sment was not sufficient to constitute formation of opinion and existence of proximate and live link for the purpose and necessity of provisional attachment which implicate the doctrine of proportionality. Under these circumstances also, I am of the considered opinion that the impugned order deserves to be quashed." 9.10 On perusal of the entire material on record, we are satisfied that the said independent arrival of opinion that there was a reason to believe is not found forthcoming from the order issued blocking the said credit and it is entirely based on the satisfaction of another officer; it is quite possible that the transaction, when entered into in 2017 or 2018 could be genuine and when the officer visits in 2020 or 2021, the business could have been closed and therefore the mere closure of business in 2020 or 2021 cannot be a basis for denying credit availed earlier. All these factors required that the respondents-revenue ought to have carefully considered and verified all aspects before taking such a drastic action of blocking credit under rule 86A which is yet another circumstance that would vitiate the impugned order. 9.11 The aforesaid facts and circ....