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2025 (4) TMI 1170 - HC - GSTBlocking of Electronic Credit Ledger (ECL) of the petitioner under Rule 86A of the Central Goods and Services Tax (CGST) Rules 2017 - before passing the impugned letter 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 - The issue decided in the case of K-9-Enterprises 2024 (10) TMI 491 - KARNATAKA HIGH COURT where it was held that i n 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 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. Conclusion - The impugned order blocking the petitioner s Electronic Credit Ledger under Rule 86A is illegal having been passed without pre-decisional hearing without independent reasons to believe and based on borrowed satisfaction. The concerned respondents are directed to unblock the Electronic credit ledger of the petitioner immediately upon the receipt of copy of this order so as to enable the petitioner to file returns forthwith - petition allowed.
The core legal issues considered by the Court revolve around the validity and legality of the impugned order blocking the Electronic Credit Ledger (ECL) of the petitioner under Rule 86A of the Central Goods and Services Tax (CGST) Rules, 2017, including whether the respondents complied with mandatory procedural safeguards such as pre-decisional hearing and independent formation of "reasons to believe." Additionally, the Court examined the legality of the provisional attachment order passed under analogous statutory provisions, focusing on the necessity and proportionality of such draconian measures to protect government revenue.
First, the Court addressed whether the respondents were justified in blocking the petitioner's ECL without providing a pre-decisional hearing and without recording independent and cogent reasons to believe that the Input Tax Credit (ITC) was fraudulently availed or ineligible. The legal framework governing this issue is Rule 86A of the CGST Rules, which mandates that before blocking the ECL, the competent authority must have "reasons to believe" based on cogent material that the credit was fraudulently or wrongly availed. This "reason to believe" must be an independent satisfaction formed by the authority after proper application of mind and cannot be based on borrowed satisfaction from other officers or mere suspicion. The Court relied heavily on the precedent set by a Division Bench in K-9-Enterprises, which clarified that the power to block ECL under Rule 86A is drastic and draconian, requiring strict compliance with procedural safeguards. The Division Bench emphasized that the authority must record reasons in writing, apply mind to the facts, and base its opinion on tangible material evidence rather than on mere investigation reports or reports of other officers. It was held that the blocking of ECL without these requirements is arbitrary, non-speaking, and legally impermissible. The Court also referred to the CBEC Circular dated 02.11.2021, which elucidates the conditions under which the power under Rule 86A can be exercised, including the necessity of forming an opinion after considering all facts and the nature of the alleged fraud or ineligibility. In the present case, the Court found that the impugned order blocking the petitioner's ECL was based solely on a communication from another officer who conducted a field visit in Goa, without any independent inquiry or application of mind by the authority issuing the blocking order. The order was cryptic, vague, and did not disclose any cogent reasons to believe that the petitioner had fraudulently availed ITC. The Court noted that the mere fact that the supplier was found to be non-existent or not conducting business at a later date cannot justify denial of credit availed earlier, especially when the genuineness of the transaction was not verified. Thus, the Court concluded that the respondents did not fulfill the twin prerequisites of Rule 86A-having reasons to believe based on material and recording those reasons in writing-and therefore the impugned order was illegal and liable to be quashed. Second, the Court examined the legality of the provisional attachment order passed under provisions analogous to Section 281B of the Income Tax Act, 1961, and Section 83 of the CGST Act, which authorize provisional attachment of property to protect government revenue. The Court reiterated the principle that such powers are draconian and must be exercised with utmost circumspection, requiring the formation of a valid opinion that provisional attachment is necessary to protect revenue interests. This opinion must be based on tangible, objective material and not on mere apprehension or subjective suspicion. The Court relied on authoritative precedents, including the Apex Court's judgment in Radha Krishan Industries and a Division Bench judgment in Vishwanath Realtor, which establish that the formation of opinion must bear a proximate and live nexus to the necessity of protecting revenue. The attachment must be proportionate to the purpose sought to be achieved, and the authority must record cogent reasons explaining why attachment is necessary. Mere apprehension of huge tax demands or possibility of default is insufficient. Applying these principles, the Court found that the impugned provisional attachment order was arbitrary, unreasoned, and passed mechanically without recording any valid opinion or reasons. The order did not demonstrate that the petitioner was a habitual defaulter, a fly-by-night operator, or likely to defeat revenue recovery. The Court emphasized that the absence of such findings and the lack of tangible material vitiated the order. Consequently, the provisional attachment order was held to be ultra vires and liable to be quashed. The Court also underscored the procedural safeguards available to the petitioner, including the right to file an appeal under Section 107 of the CGST Act after making requisite deposits, which stays recovery proceedings. The Court noted that once the final assessment order is passed, provisional attachment must cease to subsist, reinforcing the principle that such powers are temporary and conditional. In conclusion, the Court held that:
Significant holdings include the following verbatim excerpts that crystallize the Court's reasoning:
The Court thereby reaffirmed core principles governing the exercise of draconian powers under tax statutes: strict compliance with procedural safeguards, independent and reasoned formation of opinion based on tangible material, proportionality, and protection of taxpayer rights against arbitrary administrative action. The judgment underscores the necessity of balancing revenue protection with fundamental principles of natural justice and administrative law.
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