2022 (6) TMI 279 - HC - GST

Blocking of Input Tax Credit - fraudulent availment of Input Tax Credit - Rule 86A of the Central Goods and Services Tax Rules, 2017 - HELD THAT - From bare perusal of the provision of Rule 86A of the CGST Rules, it is evident that the power under Rule 86A of the CGST Rules is exercised where the prescribed officer has reason to believe that credit of input tax available in the Electronic Credit Ledger has been fraudulently availed or the assessee is ineligible. The exercise vested in the prescribed Authority is subject to a satisfaction recorded by the said Authority and forming opinion to the effect that the Credit Ledger has been fraudulently availed or the assessee is ineligible in the situations as prescribed under the Rule itself. The impugned order in the present case when tested on the touchstone of the provision contained in Rule 86A and the law referred to herein above, we find that the reason to invoke the power conferred under Rule 86A of CGST Rules against the petitioner is an intelligence report received from Principal Chief Commissioner, Central Excise and Central Tax, Vadodara Zone regarding a racket of firms indulging in fake judicial and passing of illicit ITC. Merely by recording that some investigation is going-on a drastic far-reaching action under Rule 86A of the CGST Rules cannot be sustained - It is trite law that a speaking order has to be self sustainable and respondents at this stage cannot be allowed to justify the same by adding reasons to it by filing additional affidavits. From the reading of the order it is evident that it is bereft of any material or 'reason to believe' that the petitioner is guilty of fraudulent transaction or is ineligible under Section 16 of the CGST Act. The present writ petition is allowed.

Summary

Issues:
Challenge to blocking of Input Tax Credit under Rule 86A of CGST Rules.

Analysis:
1. Background: The petitioner, a Public Limited Company engaged in manufacturing, challenged the blocking of Input Tax Credit amounting to Rs.1.9 Crore by the respondents under Rule 86A of the Central Goods and Services Tax Rules, 2017.

2. Previous Order: The petitioner had filed representations objecting to the blocking, leading to a previous order directing the respondents to decide on the representation within seven days. The petitioner then submitted a detailed written submission in support of the representation.

3. Basis of Action: The petitioner's senior counsel argued that the basis for action against the petitioner, involving a supplier named M/s Bhagwati Metals, was no longer valid as the proceedings against the supplier were dropped earlier. Therefore, there was no justification for blocking the Input Tax Credit of the petitioner.

4. Legal Arguments: The petitioner's counsel contended that Rule 86A aims to secure revenue interests as a preventive measure and that the petitioner, being a legitimate manufacturing unit with substantial turnover, should not be penalized for any misdeeds committed by its suppliers. The denial of Input Tax Credit was argued to violate constitutional rights.

5. Respondent's Position: The senior standing counsel for the respondents countered by stating that new proceedings against M/s Bhagwati Metals were initiated, leading to the cancellation of their GSTIN. An intelligence report highlighted the petitioner's involvement in a chain/racket of fake ITC generation, raising concerns about the legitimacy of the petitioner's ITC claims.

6. Rule 86A Application: The Court examined Rule 86A of the CGST Rules, emphasizing that the power to block Input Tax Credit is to be exercised when there are reasons to believe that it has been fraudulently availed or the assessee is ineligible. The Court cited a Gujarat High Court case to underscore the drastic powers conferred by Rule 86A and the importance of a valid "reason to believe."

7. Judgment: The Court found the reasons provided for invoking Rule 86A against the petitioner insufficient and lacking an independent application of mind. The intelligence report alone was deemed insufficient to justify the blocking of Input Tax Credit. Consequently, the impugned order blocking the credit was set aside, allowing the respondents to proceed with investigation if incriminating evidence is found.

8. Conclusion: The Court allowed the writ petition, setting aside the order blocking the Input Tax Credit. However, it clarified that the respondents could take further action if new evidence emerged during the investigation.