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2024 (11) TMI 598 - HC - GSTConstitutional Validity of Rule 86A of the Central Goods and Service Tax Act / State Goods and Service Tax Rules, 2017 - blocking the Electronic Credit Ledger (ECL) - 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 ' The aforesaid facts and circumstances are sufficient to come to the unmistakable conclusion 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.' 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. It is also pertinent to note that in the impugned order except stating that respondent received a letter dated 04.12.2023 reporting that the registered taxpayer M/s. Mazhar Enterprises was found to be a bill trader involved in issuance/availment in fake invoices , no other reasons are forthcoming in the impugned order. On this ground also, the impugned order dated 06.05.2024 deserves to be quashed. Impugned order dated 06.05.2024 at Annexure-A is hereby quashed - The petition is hereby allowed.
Issues Involved:
1. Validity of the order blocking the Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules. 2. Requirement of pre-decisional hearing before blocking the ECL. 3. Adequacy of reasons to believe for invoking Rule 86A. 4. Reliance on borrowed satisfaction from other authorities for blocking the ECL. Issue-wise Detailed Analysis: 1. Validity of the Order Blocking the Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules: The petitioner challenged the order dated 06.05.2024, which blocked their Electronic Credit Ledger by invoking Rule 86A of the CGST Rules. The court examined the legal framework and past judgments, particularly the Division Bench decision in K-9-Enterprises Vs. State of Karnataka, which emphasized that Rule 86A's invocation must be based on "reasons to believe" that the Input Tax Credit (ITC) was fraudulently availed or ineligible. The judgment underscored that the blocking of ECL is a drastic measure and must be exercised with utmost care, ensuring all legal prerequisites are satisfied. The court found that the impugned order lacked independent and cogent reasons for the ECL blockage, thus rendering it invalid. 2. Requirement of Pre-decisional Hearing Before Blocking the ECL: The petitioner argued that no pre-decisional hearing was provided before the ECL was blocked, violating principles of natural justice. The court referenced the K-9-Enterprises case, where it was held that a pre-decisional hearing is essential before blocking the ECL. The absence of such a hearing in the present case was deemed a significant procedural lapse, warranting the quashing of the impugned order. 3. Adequacy of Reasons to Believe for Invoking Rule 86A: The court scrutinized whether the respondents had "reasons to believe" that justified the ECL blockage. The judgment highlighted that the reasons must be based on tangible evidence and independent inquiry, not merely on borrowed satisfaction from other authorities. The impugned order relied on a report alleging the petitioner was involved in fake invoicing, but it lacked detailed reasoning or evidence. The court found this insufficient to meet the legal standard required for invoking Rule 86A. 4. Reliance on Borrowed Satisfaction from Other Authorities for Blocking the ECL: The judgment criticized the respondents for relying on borrowed satisfaction from the Enforcement authority's reports without conducting an independent analysis. The court reiterated that the power under Rule 86A should not be exercised mechanically or based on directives from other officers. The impugned order was found to be based on such borrowed satisfaction, which is impermissible in law, leading to its invalidation. Conclusion: The court allowed the petition, quashing the impugned order dated 06.05.2024, and directed the respondents to unblock the petitioner's Electronic Credit Ledger immediately. It reserved the respondents' liberty to proceed against the petitioner in accordance with law, as per the guidelines established in the K-9-Enterprises case. The judgment reinforced the necessity of adhering to procedural fairness and legal standards when exercising powers under Rule 86A of the CGST Rules.
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