2024 (10) TMI 552 - HC - GST

Blocking of credit ledger of the petitioner by mentioning Registration of supplier has been cancelled - ledger is blocked without issuing any show cause notice - violation of principles of natural justice - HELD THAT - A conjoint reading of Section 74 and Rule 86A leaves no room for any doubt that the intention and object behind insertion of those provisions is to deprive the person chargeable from a benefit which is wrongly or fraudulently claimed and enjoyed. A Section in a statute is always on a higher footing than the Rule made under the Act. As noticed, Section 74 statutorily recognizes and mandates that principles of natural justice are to be followed. Rule 86A, on the other hand, is totally silent on the aspect of applicability of principles of natural justice. Thus, if Rule 86A is implemented without following the principles of natural justice, it may cause hardship, inconvenience and injustice. It is difficult to accept that the law makers intended not to follow principles of natural justice while inserting Rule 86A in the statute book. A plain reading of the judgment in Basanta Kumar Shaw 2022 (8) TMI 50 - CALCUTTA HIGH COURT shows that the question whether the principles of natural justice are to be read into Rule 86A was not subject matter of discussion. The Calcutta High Court opined that Input Tax Credit is a concession and not a vested right. Thus, Rule 86A neither expressly nor by necessary implication excludes the principles of natural justice, the principles of natural justice for the detailed reasons given hereinabove must be read into the provision. The action of blocking the electronic credit ledger of the petitioners without following the principles of natural justice and without assigning adequate reasons cannot sustain judicial scrutiny. Thus, the impugned action in all the Writ Petitions is set aside - the impugned action cannot be countenanced - petition allowed.

Issues Involved:

1. Legality of blocking electronic credit ledger without issuing a show cause notice.
2. Interpretation and application of Rule 86A of the CGST Rules, 2017.
3. Applicability of principles of natural justice in the context of Rule 86A.
4. Availability and adequacy of statutory alternative remedies under Rule 86A(2).
5. Precedential value and interpretation of related judgments.

Issue-wise Detailed Analysis:

1. Legality of Blocking Electronic Credit Ledger Without Show Cause Notice:

The petitioners challenged the action of blocking their electronic credit ledger, arguing that it was arbitrary and violated principles of natural justice as it was executed without issuing a show cause notice. The petitioners cited previous judgments, including M/s. Laxmi Fine Chem and M/s. Sri Krishna Enterprises, to support their contention that such actions are contrary to established legal principles. The court found merit in the petitioners' argument, emphasizing that the impugned action lacked necessary details and was executed without providing an opportunity for the petitioners to defend themselves.

2. Interpretation and Application of Rule 86A of the CGST Rules, 2017:

The petitioners argued that Rule 86A should not be applied in a routine manner and must be exercised with caution. They contended that the rule was applied beyond the permissible extent, blocking more than the amount of fraudulently claimed Input Tax Credit. The court agreed with the petitioners, noting that the rule should be applied with "utmost circumspection" as emphasized in the Department's Circular dated 02.11.2021. The court highlighted that the rule requires a careful examination of facts and should not be enforced mechanically.

3. Applicability of Principles of Natural Justice in the Context of Rule 86A:

A significant issue was whether principles of natural justice should be read into Rule 86A, which does not explicitly require their observance. The court concluded that principles of natural justice must be read into Rule 86A to avoid injustice and hardship. The court reasoned that the absence of such principles would create inconsistency and friction, contrary to the harmonious working of the statute. The court relied on several Supreme Court judgments, which have read principles of natural justice into statutory provisions even when not expressly stated.

4. Availability and Adequacy of Statutory Alternative Remedies Under Rule 86A(2):

The respondents argued that the petitioners had a statutory alternative remedy under Rule 86A(2) to apply for unblocking the ledger. However, the court rejected this contention, noting that Rule 86A(2) does not prescribe a clear method for preferring an application or representation. The court emphasized that a statutory remedy requires an express right to appeal or apply, which was absent in this case. Moreover, the lack of necessary details in the impugned action would render any such remedy ineffective.

5. Precedential Value and Interpretation of Related Judgments:

The court considered various judgments, including those from the Gujarat and Calcutta High Courts, to determine the precedential value. The court distinguished the Calcutta High Court's decision in Basanta Kumar Shaw, noting that it did not address the applicability of principles of natural justice. The court reaffirmed the necessity of these principles by referencing the Gujarat High Court's decision in Samay Alloys, which had set aside similar actions under Rule 86A. The court concluded that the impugned actions in the present cases were unsustainable due to the lack of adherence to natural justice principles.

Conclusion:

The court set aside the impugned actions of blocking the electronic credit ledger in all writ petitions, allowing the department to proceed in accordance with the law, provided they follow due process and principles of natural justice. The writ petitions were allowed, and no costs were imposed.

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