2024 (10) TMI 444 - HC - GST

Blocking the Electronic Credit Ledger (ECL) - Constitutional validity of Rule 86A of the CGST/SGST Rules 2017 - HELD THAT - In the instant case since no pre-decisional hearing are provided/granted by the respondents before passing the impugned order coupled with the fact that the impugned order invoking Section 86A blocking of the Electronic credit ledger of the petition does not contain independent or cogent reasons to believe/accept by placing reliance upon reports of enforcement authority which is impermissible in law since the same is on borrowed satisfaction as held by Division Bench the impugned order deserves to be quashed. It is also pertinent to note that the impugned order except stating that the registered person/ supplier found to be non-existent or not to be conducting any business from the place for it has obtained registration no other reasons are forthcoming in the impugned order. Interestingly respondents have themselves stated that the aforesaid supplier had obtained registration and the same was cancelled only on 20.06.2024 and since the transaction between the petitioner and supplier was prior to 20.06.2024 the respondents clearly fell in error in describing/categorizing the supplier as non-existent or not to be conducting any business at the time of transaction with the petitioner. The impugned order dated 14.08.2024 deserves to the quashed - Petition allowed.

Issues Involved:

1. Validity of the impugned order blocking the Electronic Credit Ledger (ECL) under Rule 86A of the CGST/SGST Rules, 2017.
2. Compliance with principles of natural justice and requirement of pre-decisional hearing.
3. Legality of the application of Rule 86A based on "borrowed satisfaction."
4. Interpretation of "reasons to believe" under Rule 86A.
5. The impact of procedural lapses on the legality of the order.

Detailed Analysis:

1. Validity of the Impugned Order Blocking the ECL:

The petitioner challenged the order blocking their Electronic Credit Ledger under Rule 86A of the CGST/SGST Rules, 2017, arguing that it was passed without proper justification or adherence to legal requirements. The court found that the impugned order lacked independent reasons to believe that the Input Tax Credit (ITC) was fraudulently availed or ineligible. The order was primarily based on reports from other officers, which the court deemed as "borrowed satisfaction." The court emphasized that such drastic measures require a thorough and independent evaluation by the competent authority, which was absent in this case.

2. Compliance with Principles of Natural Justice and Requirement of Pre-decisional Hearing:

The petitioner contended that they were not afforded a pre-decisional hearing before the order was passed, which violated principles of natural justice. The court agreed, referencing the Division Bench's decision in K-9-Enterprises, which underscored the necessity of a pre-decisional hearing before blocking the ECL. The absence of such a hearing was deemed a significant procedural lapse, warranting the quashing of the order.

3. Legality of the Application of Rule 86A Based on "Borrowed Satisfaction":

The court scrutinized the basis of the impugned order and found that the decision to block the ECL was not independently made by the assessing officer but was influenced by findings from another officer's report. This reliance on "borrowed satisfaction" was considered impermissible under the law, as it failed to demonstrate the officer's independent application of mind, which is a prerequisite for invoking Rule 86A.

4. Interpretation of "Reasons to Believe" Under Rule 86A:

The court reiterated that "reasons to believe" must be based on objective material and independent inquiry, not merely on reports or directions from other authorities. The court highlighted that the expression implies a need for the authority to form an opinion based on tangible evidence, ensuring that the drastic power to block the ECL is exercised with caution and due diligence.

5. Impact of Procedural Lapses on the Legality of the Order:

The court found that the procedural lapses, including the lack of a pre-decisional hearing and reliance on borrowed satisfaction, rendered the impugned order arbitrary and unlawful. The court emphasized that such orders must be reasoned and based on a thorough examination of facts, failing which they are liable to be quashed.

Conclusion:

The court, in line with the Division Bench's decision, quashed the impugned order blocking the petitioner's ECL. It directed the respondents to unblock the ECL immediately, allowing the petitioner to file returns. The court also granted liberty to the respondents to proceed against the petitioner in accordance with the law, ensuring compliance with the principles set forth in the judgment of K-9-Enterprises.

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