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2025 (4) TMI 1467 - HC - GSTBlocking of ITC in terms of Rule 86A (1) (a) of the Bihar Goods Service Tax Rules 2017 - mandatory requirement of recording reasons to believe before blocking the ITC under Rule 86A - Principles of natural justice - HELD THAT - The respondent no. 3 had before him sufficient materials to satisfy himself with regard to necessity of passing an order under Rule 86-A (1) of the CGST/BGST Rules of 2017. There is no illegality or infirmity may be found with the impugned order (Annexure P/2 ) which is in the nature of an interim measure taken by respondent no. 3. The respondent no. 4 has acted on the basis of Annexure P/2 however the order if any of respondent no. 4 is not under challenge specifically. The petitioner has a remedy available against the blocking of ITC. If so advised the petitioner may avail it s remedy in terms of paragraph 3.4 of the guidelines. If any such request is made by the petitioner the respondent no. 4 shall consider the same as expeditiously as possible and pass a reasoned order after hearing the petitioner/its authorized representative. Application disposed off.
Issues Presented and Considered
The core legal questions considered by the Court were:
Issue-Wise Detailed Analysis 1. Validity of Blocking ITC under Rule 86A(1)(a) of BGST Rules, 2017 Legal Framework and Precedents: Rule 86A(1) empowers the Commissioner or an authorized officer not below the rank of Assistant Commissioner to block the debit of an amount equivalent to ITC in the ECrL if there are "reasons to believe" that the credit has been fraudulently availed or is ineligible. The rule enumerates specific grounds such as credit availed on invoices issued by a non-existent registered person or without receipt of goods or services. Judicial precedents from the Gujarat and Bombay High Courts (Samay Alloys India Pvt. Ltd. and Dee Vee Projects Ltd.) emphasize that the power under Rule 86A is drastic and must be exercised with objective satisfaction based on material, not whims or imagination. The authority must record reasons in writing and exercise the power fairly and reasonably. Court's Interpretation and Reasoning: The Court examined the impugned order and accompanying materials, including the investigation report and alert circular issued by the Central GST authorities in Kolkata, which found the supplier (TDML Services Pvt. Ltd.) non-existent at its principal place of business and involved in passing fake ITC. The Court held that these materials constituted sufficient objective basis for the Additional Commissioner to have "reasons to believe" the ITC was fraudulently availed. Key Evidence and Findings: The search operation report by the Anti-Evasion Unit, absence of any documents related to TDML Services, voluntary statements negating existence of the company, and the Alert Circular warning all concerned authorities to deny such ITC were pivotal. Application of Law to Facts: Based on these facts, the Court found no infirmity in the order blocking ITC under Rule 86A(1)(a), as the authority had sufficient material to form a reasoned belief. Treatment of Competing Arguments: The petitioner argued that the Additional Commissioner failed to apply independent mind and did not record reasons. The Court rejected this, noting the impugned communication and investigation report constituted adequate reasons. The petitioner's challenge to the absence of a DIN on the order was also dismissed, as State authorities are not bound by Central Government circulars mandating DIN. Conclusion: The interim blocking of ITC under Rule 86A(1)(a) was lawful and supported by sufficient reasons recorded in writing. 2. Requirement and Nature of "Reasons to Believe" and Recording of Reasons Legal Framework and Precedents: The phrase "reasons to believe" implies a subjective satisfaction based on objective material. The Bombay High Court in Dee Vee Projects Ltd. clarified that such reasons must be recorded in writing and cannot be arbitrary. The order must not be a mechanical exercise but founded on material facts. Court's Interpretation and Reasoning: The Court noted that the impugned order was supported by the detailed investigation report and alert circular, which were reasons recorded in writing. Unlike the two-liner order struck down in Dee Vee Projects Ltd., the present case involved substantial material forming the basis for the order. Key Evidence and Findings: The investigation report and alert circular detailed the findings of non-existence and fraudulent ITC issuance, constituting the requisite reasons. Application of Law to Facts: The Court held that the authorities complied with the requirement of recording reasons to believe and thus the order was sustainable. Treatment of Competing Arguments: The petitioner's contention that the Additional Commissioner did not apply independent mind was rejected as the order was based on independent investigation and material. Conclusion: The requirement of recording reasons to believe was fulfilled in the present case. 3. Requirement of Hearing and Principles of Natural Justice Legal Framework and Precedents: The Court referred extensively to the Division Bench judgment of the Bombay High Court in Dee Vee Projects Ltd., which held that Rule 86A does not mandate pre-decisional hearing before blocking ITC due to the urgent and drastic nature of the power. However, a post-decisional or remedial hearing must be provided within a reasonable time (usually two weeks) to avoid arbitrariness and allow the affected party to be heard. Court's Interpretation and Reasoning: The Court agreed that the power to block ITC is an administrative power with quasi-judicial characteristics and civil consequences. Given the urgency, prior hearing may not be feasible, but post-decisional hearing is necessary to safeguard the taxpayer's rights. The Court emphasized that the petitioner has the remedy of making submissions and requesting reconsideration as per guidelines. Key Evidence and Findings: The Court noted the absence of any pre-decisional hearing was not fatal given the nature of the power. The petitioner was entitled to a post-decisional hearing and to avail the remedy under the CBIC guidelines. Application of Law to Facts: The Court directed that if the petitioner makes an appropriate request, the blocking authority shall consider the matter afresh and pass a reasoned order after hearing the petitioner or its authorized representative. Treatment of Competing Arguments: The State argued that the guidelines provide adequate remedy and that pre-decisional hearing is not mandatory under Rule 86A. The Court concurred with this view. Conclusion: The absence of pre-decisional hearing is permissible; however, post-decisional hearing must be granted, and the petitioner's right to be heard shall be protected. 4. Availability of Alternative Remedy and Procedural Compliance Legal Framework and Precedents: The CBIC Guidelines dated 2nd November 2021 provide a procedural framework for blocking and unblocking ITC under Rule 86A, including the possibility of reconsideration upon submission of material evidence by the taxpayer. The guidelines also limit the blocking period to one year. Court's Interpretation and Reasoning: The Court observed that the petitioner had alternative remedies available to challenge the blocking of ITC by making submissions before the authorized officer. The Court noted that the petitioner had not specifically challenged the order of the respondent who actually blocked the ITC but only the communication from the Additional Commissioner. Key Evidence and Findings: The guidelines specify that if the taxpayer satisfies the authority that the ITC was not fraudulently availed, the credit may be allowed either partially or fully, with reasons recorded in writing. Application of Law to Facts: The Court directed that the petitioner may avail the remedy under the guidelines, and the authority shall consider the request expeditiously. Treatment of Competing Arguments: The State contended that the petitioner's writ petition was premature and circumvented the statutory remedy. The Court agreed, emphasizing procedural compliance. Conclusion: The petitioner has a statutory remedy to seek unblocking of ITC, which must be considered on merits by the authority. 5. Applicability of Central Circulars and Requirement of DIN Legal Framework and Precedents: The petitioner contended that the impugned order was invalid for lack of a Document Identification Number (DIN), as mandated by a Central Tax Circular. The Court referred to the Orissa High Court judgment holding that Central Tax circulars are binding only on Central Tax authorities and not on State Tax authorities unless adopted by the State. Court's Interpretation and Reasoning: The Court held that the State tax authorities are not bound by the Central Government's circular requiring DIN, and therefore, the absence of DIN on the impugned communication did not vitiate the order. Conclusion: The objection regarding absence of DIN was rejected as legally untenable. Significant Holdings "It must be noted that the power under rule 86-A which in effect is the power to block ECL to the extent stated earlier is drastic in nature. It creates a disability for the tax payer to avail of the credit in ECL for discharge of his tax liability, which he is otherwise entitled to avail. Therefore, all the requirements of rule 86-A would have to be fully complied with before the power thereunder is exercised. When this rule requires arriving at a subjective satisfaction which is evident from the use of words, 'must have reasons to believe', the satisfaction must be reached on the basis of some objective material available before the authority. It cannot be made on the flights of ones fancies or whims or imagination." "As regards the following of principles of natural justice, the law is now well settled. In cases involving civil consequences, these principles would be required to be followed although, the width, amplitude and extent of their applicability may differ from case to case depending upon the nature of the power to be exercised and the speed with which the power is to be used. Usually, it would suppose prior hearing before its exercise... But, it is not necessary that such prior hearing would be granted in each and every case. Sometimes, the power may be conferred to meet some urgency and in such a case expedition would be the hallmark of the power. In such a case, it would be practically impossible to give prior notice or prior hearing and here the rule of natural justice would expect that at least a post decisional or remedial hearing is granted so that the damage done due to irrational exercise of power, if any, can be removed before things get worse." "The power conferred upon the Commissioner under rule 86-A is one of such kind. It has civil consequences though for a limited period not exceeding one year and has an element of urgency which perhaps explains why the rule does not expressly speak of any show cause notice or opportunity of hearing before the ECL is blocked... post decisional or remedial hearing would have to be granted to the person affected by blocking of his ECL." "The petitioner has remedy available against the blocking of ITC. If so advised, the petitioner may avail its remedy in terms of paragraph 3.4 of the guidelines. If any such request is made by the petitioner, the respondent no. 4 shall consider the same as expeditiously as possible and pass a reasoned order after hearing the petitioner/its authorized representative." "The Court has not gone into the merit of the case and respondent no. 4 shall consider the entire matter afresh, if petitioner makes an appropriate request in this regard."
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