Answering Burning Questions in GST with analysis of latest Judgements ( Part - 3)

[Brijesh Thakar]

 Introduction

In previous two parts of this article, we discussed issue of denial of ITC to recipient for the fault of supplier and some issues on blocked credit under section 17(5).

 I also gave list of the topics that I wish to cover in this series. The list is as under

1. Denial of input tax credit to recipient  and recovery from him if supplier fails to pay tax to Government. ( section 16)
2. Some issues on blocked credit under section 17(5).
3. Is it appropriate to deny renovation of cancellation of registration saying that the taxpayer has wrongly availed ITC under section 30?
4. Can powers given under Rule 86A be exercised in all situations and electronic credit ledger of a taxpayer be blocked for a period exceeding one year?
5. Is it compulsory to provide personal hearing to the taxpayer if adverse order is to be passed?
6. Is there any limitation on exercise of powers of provisional attachment of assets under section 83?
7. If tax is wrongly paid and refund for the same is applied, will time limit given under section 54 be applicable?
8. If taxpayer has made pre deposit under section 107(6), can recovery proceedings be continued against him?
9. In which situations proceedings under section 129 be initiated and in which cases we can say that the use of section 129 is not appropriate.
10. Can assessment of non filers of return be made on any basis deem appropriate by GST officer under section 62?

First two points we have already discussed in part-1 and part-2 of the article. In this part, we will discuss point 3 and 4. Let us examine these issues in detail

3. Is it appropriate to deny renovation of cancellation of registration saying that the taxpayer has wrongly availed ITC ?

Cancellation of registration  is governed by section 29 of the CGST Act, 2017 and applicable rules made there under namely rule 21, 21A and rule 22. As per these rules there are number of reasons due to which registration of a person can be canceled by GST officer. The main reason of cancellation of registration in most of the cases is non-filing of GST returns. Once GST registration is cancelled, a person has option to apply for revocation of cancellation of registration under section 30 read with Rule 23. Section 30 has been reproduced below-

Subject to such conditions as may be prescribed, any registered person, whose registration is cancelled by the proper officer on his own motion, may apply to such officer for revocation of cancellation of the registration in the prescribed manner within thirty days from the date of service of the cancellation order.

A new proviso has been inserted to this section by GST Amendment Act, 2020 which is as under-

such period may, on sufficient cause being shown, and for reasons to be recorded in writing, be extended,––

(a) by the Additional Commissioner or the Joint Commissioner, as the case may be, for a period not exceeding thirty days;

(b) by the Commissioner, for a further period not exceeding thirty days, beyond the period specified in clause (a).”

Hence effectively, the revocation application under section 30 can be filed within 90 days ( 30 days originals plus 30 days extension by additional/joint commissioner plus another 30 days extension by commissioner.) from the date of service of cancellation order.

Corresponding amendment has also been made in Rule 23 regarding extension of time to file revocation application under section 30.

A question arises as to what are the things the GST officer needs a to look into or rather we can say he is authorised to look into while approving/rejecting revocation application? This question can be answered with the help of analysis of Rule 23.

As per proviso to Rule 23(1),

no application for revocation shall be filed, if the registration has been cancelled for the failure of the registered person to furnish returns, unless such returns are furnished and any amount due as tax, in terms of such returns, has been paid along with any amount payable towards interest, penalty and late fee in respect of the said returns.

In a recent case of  2021 (5) TMI 167 - MADRAS HIGH COURT, RAMAKRISHNAN MAHALINGAM VERSUS STATE TAX OFFICER (CIRCLE) , GOODS AND SERVICE TAX OFFICER, KOTAGIRI., DEPUTY COMMISSIONER (ST), honourable Madras High Court has held that the only thing that the proper officer needs to look into at the time of entertaining revocation application is whether the tax dues are paid and returns are filed or not. The verification of claim of input tax credit is outside the scope of Rule 23.

Observation of the court in this case is as under-

The contention of the respondents herein that the revival of registration is conditional upon the petitioner satisfying tax dues and substantiating its claim of ITC, is misconceived. What is sought for by the petitioner is revocation/revival of registration only, and in the guise of considering the application for revocation, the authorities cannot embark upon the process of assessment - An assessment would have to be made by the authority in terms of Section 73 or other applicable provision after following the procedure set out therein, and it is only in the course thereof that the officer may consider and decide questions of leviability of tax and claim of input tax credit.

Thus to state that registration will not be revived since the petitioner has incorrectly availed of ITC would be putting the cart before the horse. In fact, it is seen that the petitioner has filed monthly returns as well as annual returns for the periods January 2017-18 to September 2019-20 and for financial years 2017-18 and 2018-19 and has also remitted late fee for filing of belated returns. Thus, and these being the only conditions that are to be satisfied by the petitioner for grant of revocation of registration, the cancellation of the registration in this case is incorrect and improper.

This judgment lays down a very clear principle that the officer cannot go beyond verification of payment of government dues and filing of returns under Rule 23. The verification of claim of ITC is not within the scope of Rule 23 and it amounts to assessment for which separate provisions exist in law. Hence, once the officer is satisfied that the tax dues, interest and applicable penalty are paid and all pending returns are filed, the cancellation of registration should be revoked.  

4. Can powers given under Rule 86A be exercised in all situations and electronic credit ledger of a taxpayer be blocked for a period exceeding one year?

Rule 86A inserted vide notification no 75/2019-CT is reproduced below-

86A. Conditions of use of amount available in electronic credit ledger.

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36- 

i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

ii. without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, 

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount. 

(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.

(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.” 

This rule was inserted with the intention to curb tax evasion being done by taking fraudulent ITC. It is important to note that Rule 86A(1), There are two important points that needs to be kept in mind about Rule 86A

1. the commissioner or an officer authorised by him ( not below the rank of assistant commissioner) must have reason to believe that the credit has been fraudulently taken by the taxpayer or the credit is not eligible. Merely on the basis of doubts, powers under this Rule cannot be exercised.
2. The restriction shall cease to have effect after expiry of one year from the date of imposition of the restriction.

As far as the fraudulent availment of ITC is concerned, there is not much to object in blocking of electronic credit ledger. However, readers attention is invited to Rule 86A(1) (b), which gives power to GST officer to block credit ledger even in cases where invoice is available but merely tax is not paid by supplier to government. In my previous articles, I have discussed at length about conditions for availment of ITC as given under section 16(2). As per clause (c) of section 16(2), if supplier has not paid tax to government. Linking of section 16(2) (c) with Rule 86A can create a huge problem for taxpayer. It is also important to note that constitutional vires of section 16(2) (c) have been challenged in court of law in a number of cases. High courts have held that first GST department should initiate recovery against the supplier first and only then they can come to the recipient. (2021 (3) TMI 1020 - MADRAS HIGH COURT, M/S. D.Y. BEATHEL ENTERPRISES VERSUS THE STATE TAX OFFICER (DATA CELL) , (INVESTIGATION WING) COMMERCIAL TAX BUILDINGS, TIRUNELVELI. And 2021 (6) TMI 1052 - CHHATTISGARH HIGH COURT M/S. BHARAT ALUMINIUM COMPANY LIMITED VERSUS UNION OF INDIA AND OTHERS).

In such a situation, it is always debatable whether Rule 86A(1)(b) is valid or not. the constitutional validity of Rule 86A(1)(b) has also been challenged in Delhi High Court in case of 2021 (5) TMI 420 - DELHI HIGH COURT, FEDERATION OF INDIAN SMALL SCALE BATTERY ASSOCIATIONS (REGD.) AND ANR. VERSUS UNION OF INDIA AND ORS wherein notices are issued by Delhi High Court.

There have been cases where powers under this rule are exercised without proper application of mind and there are also cases where Electronic Credit Ledger of a taxpayer was kept blocked beyond a period of one year.

In case of 2021 (7) TMI 127 - UTTARAKHAND HIGH COURT, M/S VIMAL PETROTHIN PRIVATE LIMITED. VERSUS COMMISSIONER, CGST AND OTHERS and in case of  2021 (6) TMI 182 - KARNATAKA HIGH COURT, M/S. ARYAN TRADELINK, VERSUS THE UNION OF INDIA, THE CENTRAL BOARD OF INDIRECT TAXES & CUSTOMS, THE SUPERINTENDENT OF CENTRAL TAX, THE SUPERINTENDENT OF CENTRAL TAX, THE COMMISSIONER OF CENTRAL TAX, THE DEPUTY COMMISSIONER OF CENTRAL TAX, THE ASSISTANT COMMISSIONER OF CENTRAL TAX, both the high courts held that it impermissible to block electronic credit ledger of a person beyond a period of one year.

Other issues we will discuss in Part-4…..

Discussions to this article

[balu kv]

Part 2 is not published.

K V Balasubramanian FCA

[Brijesh Thakar]

@ k v balasubramanian sir, it is already published please check my profile, you will find it. Thank you

[SUDHIR KHANOLKAR]

Please write a article with some case laws , where ITC can be claimed even beyond September of the next financial year. At least in initial years and more so when the returns themselves are filed with late fees beyond september of the next financial year

[OmPrakash jain]

Sir,

One of the condition for avialment of ITC u/s 16(2), CGST Act, 2017 is “furnishing of return u/s 39”. This clause nowhere mentions “timely submission of returns and/or debarring rectification of any return belatedly, for being entitled to avail ITC. The “notwithstanding clause”, in the section 16(2) means that it supersedes all the sub-sections of section 16, per decision of the cases in Central Bank of India v. State of Kerala 2009 (2) TMI 451 - SUPREME COURT & Synergy Fertichem Pvt. Ltd. v. State of Gujarat & Ors.2019 (12) TMI 1213 - GUJARAT HIGH COURT.

As such, in our view, if a registered person has furnished returns &/or rectified any return belatedly, he is entitled to ITC irrespective of section 16(4) CGST Act, 2017 and his vested right per SC Judgment in Eicher Motors Ltd. v. Union of India (SC) 1999 (1) TMI 34 - SUPREME COURT, can not be withdrawn in the absence of a clear legal prohibition, by framing rules, which are procedural in nature and can not be construed as a mandatory provisions per decisions of the case in Adfert Technologies Pvt. Ltd. v. Union of India (P&H) 2019 (11) TMI 282 - PUNJAB AND HARYANA HIGH COURT, which has been endosed by the SC in Union of India & Ors. v. Adfert Technologies Pvt. Ltd.(SC) 2020 (3) TMI 188 - SC ORDER. Moreover, the Govt. has no legal authority to retain the amount of credit to which the respondent in the present case is entitled to and retention of it by the Govt., cannot be sustained, being violative of Article 265 of the Constitution of India per decision of the case in Jakap Metind Pvt. Ltd. v. Union of India & Ors.(Guj) 2019 (11) TMI 710 - GUJARAT HIGH COURT.

In view of the above, in our view, ITC is not required to be reversed.

[Brijesh Thakar]

@ Om Prakash jain, Thanks for the views though I have doubt on sustainability of the argument about the non-obstante clause in section 16(2). The same argument has been made at Calcutta High Court and High court has issued notice to parties.

As per my opinion there is ray of hope in only two cases

1. Court strike down section 16(4) and /or section 16(2)(c) being ultra vires to article 14, article 19(1)(g) and of course article 265

2. Court reads down section 16(2)(c). I have discussed at length doctrine of reading down in my previous article.

The decision of constitutional bench of honorable Supreme Court in case of Delhi Transport Corporation v. DTC Mazdoor Congress 1990 (9) TMI 334 - SUPREME COURT is worth reading to understand this doctrine.