2022 (3) TMI 908 - HC - GST

Blocking of input tax credit - reasons for blocking of credit not conveyed - whether the respondent no.3 was justified in blocking the ITC under Rule 86A of CGST Rules? - HELD THAT - Rule 86A undoubtedly could be said to have conferred drastic powers upon the proper officers if they have reason to believe that the activities or invoices are suspicious. The Rule 86A is based on reason to believe . Reason to believe must have a rational connection with or relevant bearing on the formation of the belief. It is a subjective term and can be interpreted differently by different individuals. Prima facie, it appears that the Rule 86A does not even contemplate for issue of any show-cause notice or intimation notice. In such circumstances, the person affected may be taken by surprise when he would go to the portal to pay taxes and finds that his ITC is not usable. The power under rule 86-A which in effect is the power to block ECL to the extent stated earlier is drastic in nature. It creates a disability for the tax payer to avail of the credit in ECL for discharge of his tax liability, which he is otherwise entitled to avail. Therefore, all the requirements of rule 86-A 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 - Any administrative power having quasi-judicial shades, which brings civil consequences for a person against whom it is exercised, must answer the test of reasonableness. It would mean that the power must be exercised fairly and reasonably by following the principles of natural justice. The provisions made in rule 86-A would require the Competent Authority to first satisfy itself, on the basis of objective material, that there are reasons to believe that credit of input tax available in ECL has been fraudulently or wrongly utilised and secondly to record these reasons in writing before the order of disallowing debit of requisite amount to the ECL or requisite refund of unutilised credit, is passed or otherwise the order of blocking the ECL under rule 86-A would be unsustainable in the eye of law - It can be said that there is a specific mechanism for reversing the credit in the case of a discrepancy in the ITC availed by the recipient, against the output liability of the supplier. However, the ITC reversal mechanism, as laid down in section 41 read with Rules, is kept in abeyance. The facility to furnish GSTR 2 and GSTR 3 Forms is also not available. Accordingly, there is no system-based matching of the ITC being carried out presently, and till the time such provisions are given effect, the recipients shall be eligible to claim ITC provisionally on the basis of the invoice issued by customer. The impugned order of blocking of the ECL of the writ applicant is hereby quashed and set aside - Application allowed in part.

Summary

Issues Involved:
1. Blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods and Services Tax (CGST) Rules, 2017.
2. Compliance with principles of natural justice.
3. Validity and application of Rule 86A in the absence of Section 43A of the CGST Act, 2017.
4. Bona fide recipient's liability for the supplier's default.

Detailed Analysis:

1. Blocking of Input Tax Credit (ITC) under Rule 86A of the CGST Rules, 2017:
The petitioner, a proprietary concern engaged in trading M.S. Scrap, challenged the blocking of ITC amounting to ?97,17,290 by the respondent under Rule 86A. The petitioner claimed to have received the necessary tax invoices, weighment slips, and e-way bills for the purchases made from M/s. Anmol Enterprise, which were duly reflected in the relevant GST forms (GSTR-3B, GSTR-2A, and GSTR-2B). The blocking of ITC was reportedly done without assigning any reasons, leading to the present writ application.

2. Compliance with principles of natural justice:
The court emphasized that Rule 86A, which allows blocking of ITC, requires the authority to have "reasons to believe" that the credit has been fraudulently availed or is ineligible. This belief must be based on objective material and recorded in writing. The court noted that the impugned order lacked any reasons and failed to meet the requirements of Rule 86A, thus constituting an arbitrary exercise of power. The court also highlighted the necessity of providing post-decisional hearing to the affected party within a reasonable period, typically not beyond two weeks from the date of blocking the ECL.

3. Validity and application of Rule 86A in the absence of Section 43A of the CGST Act, 2017:
The court observed that Rule 86A, which allows blocking of ITC, was notified before Section 43A of the CGST Act, 2017, which provides for joint and several liability of the supplier and recipient, was brought into force. Since Section 43A has not been notified, the court opined that Rule 86A lacks statutory authority to block a recipient’s credit ledger due to the supplier’s default. The court noted that the absence of a system-based matching of ITC further complicates the issue, as the recipients are currently eligible to claim ITC provisionally based on the invoice issued by the supplier.

4. Bona fide recipient's liability for the supplier's default:
The court referred to several precedents, including the Delhi High Court's decision in Quest Merchandising India Pvt. Ltd. and the Madras High Court's decision in Sri Vinayaga Agencies, which held that a bona fide recipient should not be penalized for the supplier's failure to deposit tax. The court reiterated that the authorities should proceed against the defaulting supplier rather than denying the recipient their legitimate ITC. The court emphasized that any action against the recipient must be based on evidence of collusion or fraud involving the recipient and the supplier.

Conclusion:
The court allowed the writ application in part, quashing the impugned order blocking the ECL of the petitioner. The respondents were granted the liberty to pass a fresh order under Rule 86A in compliance with the principles of natural justice and the observations made by the court. The court underscored the need for objective material and recorded reasons to justify the blocking of ITC, ensuring that bona fide recipients are not unduly penalized for the supplier's defaults.