TaxTMI 
TaxTMI 
TaxTMI 
2025 (8) TMI 1124
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....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 fact that the notice / endorsement dated 28.02.2025 did not contain reasons to bel....
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....0077 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, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as (a) The credit of input tax has been availed on the strength of tax invoices or debit....
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....ss 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 of fraud, wilful misstatement or suppression of facts. The effective date of cancellation of your registration is 01/01/2023. 2. Kindly refer to the supportive document(s) attached for case specific details - Not Applicable. 3. It may be noted that a registered person furnishing return under subsection (1) of Section 39 of the CGST Act, 2017 is required to furnish....
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....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" would necessarily mean that the respondents must arrive at a satisfaction based on their own independent inquiry and not upon borrowed inquiry as has been done in the instant case. 9.2 The learned single judge [K-9-Enterprises v. State of Karnataka, (2025) 137 GSTR 426 (Karn).] also failed to appreciate that rule 86A was drastic and draconian in nature warranting existence of "reasons to believe" before exercising the said power by strictly complying with all the conditions/r....
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....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 credit involved; and whether disallowing such debit of electronic credit ledger of a person is necessary for restricting him from utilizing/passing on fraudulently availed or ineligible input-tax credit to protect the interests of revenue. 3.1.4 It is reiterated that the power of disallowing debit of amount from electronic credit ledger must not be exercised in a mechanical manner and careful examination of all the facts of the case is important to determine case(s) fit for exercising power under rule 86A. The remedy of disallowing debit of amou....
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.... 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 by the Asst. State Tax Officer, Vasco-D-Gama, (Goa)). There was no tangible material to form any belief that the ITC lying in the appellants' ECL was on account of any fake invoice; it had proceeded to take action solely on the basis of a direction issued by another authority. Before the drastic measure to block a taxpayer's ECL is taken, it was necessary for the concerned officer to have some material to form a belief that the conditions under rule 86A are satisfied by making an independent analysis before such action is taken and even this aspect has not been consid....
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....ependently 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 input tax which is impermissible in law without checking the genuineness or otherwise of the transaction and consequently, the impugned orders are bald, vague, cryptic, laconic, unreasoned and non-speaking and deserve to be set aside. 9.9 While dealing with the provisions of the CGST Act, this court in Xiaomi's case [Xiaomi Technology India Pvt. Ltd. v. Deputy Commissioner of Income-tax, (2023) 451 ITR 58 (Karn); 2022 SCC OnLine Kar 1731; (2022) 145 taxman.com 501 (Kar).], wherein one of us speaking for the court held as under (paras 8-14, pages 66-73 in 451 ITR): "10. A perusal of the....
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....t 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 consequences which emanate from the attachment of any property including a bank account of the taxable person, it conditioned the exercise of the power by employing specific statutory language which conditions the exercise of the power. The language of the statute indicates first, the necessity of the formation of opinion by the Commissioner; second, the formation of opinion before ordering a provisional attachment; third the existence of opinion that it is necessary so to do for the purpose of protecting the interest of the Government revenue; fourth, the issuance of an order in writing for the attachment of any property of ....
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....ecessary 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 sub-section (1) of section 83, as interpreted above, would leave no manner of doubt that while ordering a provisional attachment the Commissioner must in the formation of the opinion act on the basis of tangible material on the basis of which the formation of opinion is based in regard to the existence of the statutory requirement. While dealing with a similar provision contained in section 45 (section 45(1) provides as follows): "45. Provisional attachment.-(1) Where during the tendency of any proceedings of assessment or reassessment of turnover escaping assessment, the Commissioner is of the opinion that for the purpose of prote....
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....able 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 proceedings under section 74 had concluded against GM Powertech, would not satisfy the requirements of section 83. Thus, the order of provisional attachment was ultra vires section 83 of the Act. 53. On March 1, 2021, the appellant has filed an appeal under section 107 together with a deposit of Rs. 32,15,488 representing ten per cent. of the tax due. Section 107(6) contains the following stipulation: "107. (6) No appeal shall be filed under sub-section (1), unless the appellant has paid- (a) in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and (b) a sum equal to ten per c....
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.... 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 by formation of an opinion by the authorities that it is necessary to do so for the purpose of protecting the interest of Government revenue. Before the order of provisional attachment, the Commissioner must form an opinion on the basis of the tangible material available for attachment that the assessee is not likely to fulfil the demand payment of tax and it is therefore necessary to do so for the purpose of protecting the interest of the Government revenue. In addition to the aforesaid mandatory requirements, before passing the provisional attachment order, it is also incumbent upon the authorities to come to a conclusion based on the tangible material that without attaching the provisional attachment, it is not ....
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....ary 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 attachment order and the exercise of the same must necessarily be preceded by the formation of an opinion that it was necessary to do so for the purpose of protecting the interest of Government revenue, that too on the basis of tangible material that the petitioner was not likely to fulfil the demand and on the other hand, was likely to defeat the demand, which is conspicuously missing and absent in the impugned order. 14. The impugned order also 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 and TPO and have not independently formed an opinion on the lik....
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....osed 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 circumstances are sufficient to come to the unmistakable conclusion that in the absence of valid nor sufficient material which constituted "reasons to believe" which was available with respondents, the mandatory requirements/prerequisites/ingredients/parameters contained in rule 86A had not been fulfilled/satisfied by the respondents-Revenue who were clearly not entitled to place reliance upon borrowed satisfaction of another officer and pass the impugned orders illegally and arbitrarily blocking the ECL of the appellant by invoking rule 86A which is not only contrary to law but also the material on record and consequently, the impugned orders deserve to be quashed. Point No. 2 is also accordingly answered in favour of the appellants by holding that the respondents-revenue commit....