2023 (8) TMI 170 - HC - GST

Blocking their Input Tax Credit (ITC) - invocation of Rule 86A of the Central Goods and Services Tax Rules, 2017 - fraud played by the petitioners in the transaction or not - opportunity of hearing not given - violation of principles of natural justice - HELD THAT - From a reading of Rule 86A of the Rules of 2017, it is seen that the first part of the Rule deals with the conditions that are required to be fulfilled in order to invoke the powers under the Rule, and the second part of the Rule provides for the consequences that would follow in case Rule 86A of the Rules of 2017 is invoked by the competent authority - the foremost condition to enable the competent authority to invoke Rule 86A of the Rules of 2017 would be that credit of input tax should be available in the electronic credit ledger as on the date the competent authority decides to invoke Rule 86A of the Rules of 2017. Such credit which is available in the electronic credit ledger should be the result of fraudulent transactions. Unless the competent authority is fully satisfied that there is a prima facie case for invoking Rule 86A of the Rules of 2017, he cannot invoke Rule 86A, as the consequence/result of the same would be having a direct bearing not only on the business of the registered person, but also on his credentialities. The powers under Rule 86A of the Rules of 2017 can be invoked or exercised by the competent authority only in the event he has reason to believe that the credit of input tax available in electronic credit ledger have been fraudulently availed or the assessee is ineligible for the same. The powers under Rule 86A of the Rules which are vested with the competent authority is subject to the satisfaction recorded by the said authority on he forming an opinion to the effect that the electronic credit ledger has been fraudulently availed or that the assessee is ineligible to avail the benefits of the same in situations where the Rule provides for the competent authority to invoke the same - reliance can be placed in the case of S.S.Industries 2020 (12) TMI 1120 - GUJARAT HIGH COURT where the Division Bench of Gujarat High Court held that The power under Rule 86A of the Rules should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee. The particulars of the input tax availed by such tax payer who is said to be not in existence are also given in the impugned order. The action of the respondents is being taken in the interest of the Revenue and it is only a preventive measure. The Court while considering the correctness of the said Act is entitled to examine whether there was any material available with the State Government and if such material is available, whether the reasons recorded in the formation of opinion are found in the order. If such reasons are found, the Court can also examine whether the reasons for formation of opinion have got a rational connection or bearing on the formation of such opinion by the competent authority. If the Court finds that the subjective satisfaction of the competent authority is not based on any credible information, then the act of the competent authority in blocking the ITC in exercise of its power under Rule 86A of the Rules of 2017 may not be sustainable. The first requisite of the Rule which is required to be considered by the competent authority is with regard to the basis of material available before he taking any action for blocking of electronic credit ledger. The second pre-requisite is of recording the reasons in writing for invoking the powers under Rule 86A of the Rules of 2017. Unless the aforesaid two pre-requisites are fulfilled, the competent authority cannot invoke the powers under Rule 86A of the Rules of 2017 for the purpose of disallowing the debit of the determined amount to the electronic credit ledger or to block the electronic credit ledger even to the extent of amount fraudulently or wrongly availed by the petitioners/assessee - In so far as the second pre-requisite of Rule 86A of the Rules is concerned which is of recording of reasons in writing, in the present case, the competent authority has observed that the petitioners/assessee have availed ITC from registered persons who are found to be not in existence or not conducting any business from any place and the registration obtained by them was in contravention of the provisions of the Statute. The details of the input tax availed by such tax payer is also given in the impugned order. This Court, however, cannot ignore the fact that the power under Rule 86A of the Rules of 2017 is drastic in nature and in the event of the said power being exercised against an assessee, it disentitles him to avail of the credit in the electronic credit ledger for discharge of his tax liability which he is otherwise entitled to avail. Therefore, serious civil consequences will have to be faced by the assessee. The order passed under Rule 86A of the Rules of 2017 would act as an obstruction to the right of the assessee to utilize the credit available in his electronic credit ledger - When the impugned order is taken into consideration based on this context, the question that arises for consideration would be whether the power under Rule 86A of the Rules of 2017 can be exercised without complying the principles of natural justice. The question whether the availment of ITC is a vested right, was considered by the Division Bench of Calcutta High Court in Basanta Kumar Shaw 2022 (8) TMI 50 - CALCUTTA HIGH COURT and it has been held that the right conferred on the assessee is regulated by the provisions of the Act and it is a concession granted under the Statute and unless and until the assessee complies with all the conditions scrupulously, he would not be entitled to avail the ITC. Considering the scope, applicability and the manner of power exercised by the competent authority under Rule 86A of the Rules of 2017, it may not be feasible for the authority to have a normal pre-decisional hearing and since the nature of order passed under Rule 86A is provisional, it would be reasonable to consider granting a post-decision hearing to the petitioners which would comply with the principles of natural justice - The effect of the order under Rule 86A of the Rules of 2017 would be that the petitioners/assessees would not be entitled to avail the input tax credit available in their Electronic Credit Ledger for a temporary period and otherwise, the petitioners/assessees are free to carry on their business by effecting payment of the requisite amount of tax into their account. Therefore, even after orders are passed under Rule 86A of the Rules of 2017, the petitioners/assessees can carry on their business activities. The writ petitions are disposed of directing respondent no.2 to afford an opportunity of post- decisional hearing to the petitioners, who shall be permitted to file their objections along with the relevant supporting documents/material and on consideration of the same, respondent no.2/competent authority shall pass a reasoned order in compliance of the requirement of Rule 86A of the Rules of 2017.

Summary

Issues Involved:
1. Blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods and Services Tax Rules, 2017.
2. Violation of principles of natural justice.
3. Vested rights of ITC and its utilization.
4. Requirement of pre-decisional and post-decisional hearings.

Summary:

Issue 1: Blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods and Services Tax Rules, 2017:

The petitioners challenged the orders blocking their ITC in the Electronic Credit Ledger under Rule 86A of the Central Goods and Services Tax Rules, 2017. The respondents justified the blocking based on field reports indicating fraudulent transactions. The court examined the scope and applicability of Rule 86A, noting that it can be invoked only if the credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible. The court cited various judgments emphasizing that the power under Rule 86A is drastic and should be exercised with caution and based on credible material.

Issue 2: Violation of principles of natural justice:

The petitioners argued that the orders were issued without affording them an opportunity of hearing, violating the principles of natural justice. The respondents contended that neither the Act nor the Rules require a hearing before taking action under Rule 86A. The court acknowledged that while pre-decisional hearing might not always be feasible, a post-decisional hearing should be provided to comply with the principles of natural justice. The court referenced the judgment in Dee Vee Projects Ltd., which held that post-decisional hearing should be granted to the affected party within a reasonable period.

Issue 3: Vested rights of ITC and its utilization:

The court discussed the nature of ITC, noting that it is a concession granted under the statute and not a vested right. The utilization of ITC is subject to compliance with statutory conditions. The respondents argued that the petitioners could continue their business by effecting payment of the requisite tax amount, even if the ITC is blocked temporarily.

Issue 4: Requirement of pre-decisional and post-decisional hearings:

The court highlighted the need for recording reasons in writing when invoking Rule 86A, as it has significant civil consequences. The court emphasized that the power under Rule 86A should be exercised fairly and reasonably, following the principles of natural justice. The court directed the respondents to provide a post-decisional hearing to the petitioners, allowing them to file objections and supporting documents. The competent authority was instructed to pass a reasoned order within two weeks of the hearing, either confirming or revoking the provisional order of blocking the ITC.

Conclusion:

The writ petitions were disposed of with directions to the competent authority to afford a post-decisional hearing to the petitioners and pass a reasoned order based on the objections and supporting documents submitted by the petitioners. The court emphasized compliance with Rule 86A and the principles of natural justice in the process.