2021 (9) TMI 55 - HC - GST

Blocking of input tax credit in the electronic credit ledger - Power of Commissioner or an officer authorised by him under Rule 86A of the SGST Rules - pending inquiry or investigation into the allegations of fraudulent transactions with respect to fake/bogus invoices for the purpose of availing the ITC - SGST Rules, came into force vide Notification dated 05.2.2020 - power of revisional authority under Section 108 and to revise order passed by the Appellate Authority without adhering the procedure and especially without calling for and examining the record of the Appeal No.GST-95/2020 Year 2019 - Grant of opportunity of hearing - principles of natural justice. HELD THAT - The Rule 86A is in respect of the power and procedure for blocking the input tax credit (ITC) in the electronic credit ledger of a registered person. A bare reading of Section 86A indicates that the Commissioner or an officer authorised 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, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount. The invocation of Rule 86A of the Rules for the purpose of blocking the input tax credit may be justified, if the concerned authority or any other authority, empowered in law, is of the prima facie opinion based on some cogent materials that the ITC is sought to be availed based on fraudulent transactions like fake/bogus invoices etc. The power conferred upon the authority under Rule 86A of the Rules for blocking the ITC could be termed as a very drastic and farreaching power. Such power should be used sparingly and only on subjective weighty grounds and reasons. The power under Rule 86A of the Rules should neither be used as a tool to harass the assessee nor should it be used in a manner, which may have an irreversible detrimental effect on the business of the assessee. The aspect of availing the credit and utilization of credit are two different stages. The utilization of credit is a vested right. No vested right accrues before taking credit. There needs to be some guidelines or procedure for the purpose of invoking Rule 86A of the Rules. In the absence of the same, Rule 86A could be misused and may have an irreversible and detrimental effect on the business of the person concerned. Rules of natural justice are not embodied rules. The phrase natural justice is also not capable of a precise definition. The underlying principle of natural justice, evolved under the common law, is to check arbitrary exercise of power by the State or its functionaries. Therefore, the principle implies a duty to act fairly, i.e. fair play in action - the respondent no.3 has assumed the jurisdiction under Section 108 without calling for and examining the record of the aforesaid Appeal filed by the petitioner company. The respondent no.3 has assumed the jurisdiction under Section 108 merely on the basis of letter sent by the respondent no.4. The powers, as conferred under Rule 86A, could not have been exercised merely on the ground that an inquiry has been initiated as there is a suspicion that the transactions were sham. In the present matter, admittedly without summoning the record the notice was prepared by the subordinate officers in which two options were indicated to the revisional authority with an observation that in case second option is approved, accordingly stay order may be prepared. This may not be intention of the legislature while incorporating the said feature. Once the supervisory power is being exercised in absence of relevant record merely on the basis of certain noting, which is forwarded to the revisional authority for exercising the powers it is sheer misuse of the power. The said practice cannot be accepted by this Court - the Court is of the considered opinion that while exercising the revisional power the authority has given go-bye to the procedure, that too without application of independent mind. The intent of the legislature to accord such power under the revision with a rider is to ensure that there may not be errors in the order passed by the officer subordinate to the revisional authority and the order may not be prejudicial to the interest of revenue. Petition allowed.

Summary

Issues Involved:
1. Blocking of Input Tax Credit (ITC) under Rule 86A of the SGST Rules.
2. Exercise of Revisional Powers under Section 108 of the SGST Act.
3. Principles of Natural Justice in the context of blocking ITC and revisional proceedings.

Detailed Analysis:

1. Blocking of Input Tax Credit (ITC) under Rule 86A of the SGST Rules:
The petitioner, a company dealing in Mentha oil, faced blocking of ITC amounting to ?95,11,774 under Rule 86A of the SGST Rules. The petitioner argued that the blocking was done without proper reasons to believe that the ITC was fraudulently availed or ineligible. The Appellate Authority found that the order blocking the ITC did not disclose any reasons to believe and was passed without verifying the details provided by the petitioner. The Appellate Authority highlighted that the blocking of ITC should be based on verified facts and not merely on suspicion. The Court emphasized that Rule 86A should be invoked sparingly and only on subjective weighty grounds, supported by credible materials.

2. Exercise of Revisional Powers under Section 108 of the SGST Act:
The revisional authority exercised its powers under Section 108 to stay the order of the Appellate Authority, which had unblocked the ITC. The petitioner contended that the revisional authority did not follow the due process, including calling for and examining the records of the Appellate Authority before passing the stay order. The Court noted that the revisional authority must fulfill two conditions: the order must be erroneous and prejudicial to the interest of revenue. The Court found that the revisional authority acted without independent application of mind and merely on the basis of subordinate officers' notings. The Court held that the revisional authority's action was a misuse of power and set aside the impugned order.

3. Principles of Natural Justice:
The Court underscored the importance of principles of natural justice, which require that any action affecting the rights of a party must be taken after giving an opportunity of being heard. The Court observed that the revisional authority did not serve any notice or grant an opportunity of hearing to the petitioner before passing the stay order. The Court emphasized that the rules of natural justice must be followed to ensure fair play in action and prevent miscarriage of justice. The Court held that the revisional authority's failure to adhere to these principles rendered the impugned order unsustainable.

Conclusion:
The Court allowed the writ petition, setting aside the impugned order dated 26.3.2021 passed by the revisional authority. The Court directed that the original record be returned to the State respondents and emphasized the need for adherence to principles of natural justice and proper application of mind in exercising revisional powers.