2024 (10) TMI 491 - HC - GST

Blocking of ITC in the Electronic Credit Ledger of the Appellants by invoking Rule 86A of the CGST Rules - justification in not providing/granting a pre-decisional hearing to the appellants before passing the impugned order blocking its Electronic Credit Ledger under Rule 86A of the CGST Rules - violation of principles of natural justice. Whether the respondents-revenue were justified in not providing/granting a pre-decisional hearing to the appellants before passing the impugned order blocking its Electronic Credit Ledger under Rule 86A of the CGST Rules? - HELD THAT - A plain/bare reading of Rule 86A will indicate that there is absolutely no express provision for compliance with principles of natural justice; however, there could arise occasions/situations when principles of natural justice can be read into statutory provisions though they are not expressly present in the provisions - though Rule 86A does not expressly/specifically provide for adherence to principles of natural justice, the same would necessarily have to be read into Rule 86A and complied with while invoking the said provision. It would also be apposite to state that when the ECL of the appellants was sought to be blocked and such credit cannot be utilised for upto 1 year, the said blocking would entail and result in serious civil consequences for the appellants warranting compliance with the principles of natural justice and providing an opportunity of hearing to the appellants. The learned Single Judge clearly fell in error in coming to the conclusion that a pre-decisional hearing was not required to have been provided/granted to the appellants by the respondents-revenue prior to passing the impugned orders blocking the ECL of the appellants and consequently, the said findings recorded by the learned Single Judge deserve to be set aside - the issue is accordingly answered in favour of the Appellant and against the respondents-revenue by holding that respondents-revenue committed a grave and serious error/illegality/infirmity in not providing/granting a pre-decisional hearing to the Appellant before passing the impugned order blocking its Electronic Credit Ledger under Rule 86A of the CGST Rules and consequently, the impugned orders deserve to be set aside. Whether the respondents-revenue were justified in passing the impugned orders blocking the Electronic Credit Ledger of the Appellants by invoking Rule 86A of the CGST Rules? - HELD THAT - 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 - On a perusal of the impugned orders, it is crystal clear that the order to block the ECL provisionally was out of the borrowed satisfaction of the respondent authorities rather than based on any independent analysis. 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. In the absence of valid nor sufficient material which constituted reasons to believe which was available with respondents, the mandatory requirements/pre-requisites/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 - the issue is answered in favour of the appellants by holding that the respondents-revenue committed a grave and serious error/illegality/infirmity in passing the impugned orders blocking the Electronic Credit Ledgers of the Appellants by invoking Rule 86A of the CGST Rules. Whether the impugned order passed by the learned Single Judge warrants interference in the present appeals? - HELD THAT - It is already concluded that the learned Single Judge committed an error in holding that a pre-decisional hearing was not required prior to passing the impugned orders and that the respondents had satisfied the requirements/ingredients for invocation of Rule 86A and that the said findings recorded by the learned Single Judge deserve to be set aside. Under these circumstances, upon re-appreciation, re-evaluation and re-consideration of the entire material on record, the order of the learned Single Judge is not only contrary to law but also the material on record warranting interference in the present appeals which deserve to be allowed - the issue is answered in favour of the appellants by holding that the order of the learned Single Judge deserves to be set aside and the writ petitions preferred by the appellants-writ petitioners deserve to be allowed by quashing the impugned orders. The impugned order is set aside - Appeal allowed.

Summary

Issues Involved:

1. Whether the respondents-revenue were justified in not providing a pre-decisional hearing to the appellants before blocking the Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules.
2. Whether the respondents-revenue were justified in blocking the ECL of the appellants by invoking Rule 86A of the CGST Rules.
3. Whether the impugned order passed by the learned Single Judge warrants interference in the present appeals.

Detailed Analysis:

Re: Point No.1

The court examined whether the respondents-revenue were justified in not granting a pre-decisional hearing before blocking the ECL. Rule 86A of the CGST Rules does not explicitly provide for compliance with the principles of natural justice, but the court found that such principles must be read into the rule. The blocking of the ECL, which prevents the utilization of input tax credit for up to a year, results in serious civil consequences, necessitating a pre-decisional hearing. The court cited several precedents, including CB Gautam and Sahara India Firm, to emphasize that civil consequences require adherence to natural justice principles. The court concluded that the respondents-revenue committed a grave error by not providing a pre-decisional hearing, and the learned Single Judge's conclusion that a post-decisional hearing was sufficient was erroneous. Therefore, the court held that the impugned orders blocking the ECL without a pre-decisional hearing deserve to be set aside.

Re: Point No.2

The court considered whether the respondents-revenue were justified in blocking the ECL by invoking Rule 86A, which requires "reasons to believe" that the input tax credit was fraudulently availed or ineligible. The learned Single Judge had concluded that the respondents-revenue satisfied the prerequisites for invoking Rule 86A. However, the court found this conclusion erroneous, noting that the "reasons to believe" were based on a field visit report from another officer without independent verification. The court emphasized that Rule 86A is drastic and requires strict compliance, including independent verification of facts. The court also highlighted that the CBIC Circular mandates careful examination and objective determination before disallowing debit from the ECL. The court found that the respondents-revenue acted on borrowed satisfaction rather than independent analysis, rendering the impugned orders arbitrary and unjustified. Consequently, the orders blocking the ECL were quashed.

Re: Point No.3

The court reviewed the findings of the learned Single Judge and concluded that the order was contrary to law and the material on record. The learned Single Judge erred in holding that a pre-decisional hearing was unnecessary and that the respondents-revenue met the requirements for invoking Rule 86A. The court, upon re-evaluation, determined that the appeals deserved to be allowed, and the writ petitions filed by the appellants should be granted by quashing the impugned orders.

Conclusion:

The court allowed all the writ appeals, set aside the impugned common order of the learned Single Judge, and quashed the orders blocking the ECL of the appellants.