2024 (10) TMI 789 - HC - GST

Blocking of Electronic Credit Ledger - pre-decisional hearing was not provided to the petitioner nor does the impugned order contain any reason to believe as to why it was necessary to block the Electronic credit ledger - violation of principles of natural justice - HELD THAT - In K-9-ENTERPRISES, KWALITY METALS, K-9-INDUSTRIES VERSUS THE STATE OF KARNATAKA, THE ASSISTANT COMMISSIONER OF COMMERCIAL TAXES, BELAGAVI. 2024 (10) TMI 491 - KARNATAKA HIGH COURT it was held that ' 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.' Thus, in the instant case, since no pre-decisional hearing was provided/granted by the respondents before passing the impugned order, coupled with the fact that the impugned order invoking Section 86A of the CGST Rules by blocking of the Electronic credit ledger of the petitioner does not contain independent or cogent reasons to believe except by placing reliance upon the reports of Enforcement authority which is impermissible in law, since the same is on borrowed satisfaction as held by the Hon ble Division Bench of this Court, the impugned order deserves to be quashed. The impugned orders are set aside - petition allowed.

Summary

Issues Involved:
1. Whether the blocking of the Electronic Credit Ledger (ECL) without a pre-decisional hearing was justified.
2. Whether the invocation of Rule 86A of the Central Goods and Services Tax Rules, 2017, by the respondents was based on valid and independent reasons to believe.

Issue-wise Detailed Analysis:

1. Pre-decisional Hearing Requirement:
The petitioner argued that the blocking of the Electronic Credit Ledger was done without providing a pre-decisional hearing, which is a procedural requirement. The court referred to the precedent set in the case of K-9-Enterprises Vs. State of Karnataka, where it was held that a pre-decisional hearing is necessary before passing orders that block the ECL. The court found that in the present case, no such hearing was provided, which constituted a procedural lapse. The lack of a pre-decisional hearing was deemed a significant error, warranting the quashing of the impugned order.

2. Invocation of Rule 86A and Reasons to Believe:
The respondents invoked Rule 86A of the CGST Rules to block the petitioner's ECL, claiming reasons to believe that the Input Tax Credit (ITC) was fraudulently availed or ineligible. The court scrutinized whether the respondents had independently formed these reasons to believe. The judgment emphasized that Rule 86A requires the authority to have reasons to believe based on independent inquiry and tangible material, not merely on reports or directions from other officers. The court found that the impugned order was based on borrowed satisfaction from another officer's report, without independent verification or application of mind by the concerned authority. This reliance on external reports without an independent assessment was deemed impermissible and contrary to the legal requirements under Rule 86A.

Conclusion:
The court concluded that both the lack of a pre-decisional hearing and the absence of independent reasons to believe rendered the blocking of the ECL unjustified. Consequently, the court quashed the impugned orders and directed the respondents to unblock the petitioner's Electronic Credit Ledger immediately. The court also granted liberty to the respondents to proceed against the petitioner in accordance with the law, as per the judgment in K-9-Enterprises Vs. State of Karnataka.