2024 (11) TMI 581 - HC - GST

Blocking of the Electronic Credit Ledger (ECL) under Rule 86A of the Central Goods and Services Tax Rules, 2017 - 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 s case 2024 (10) TMI 491 - KARNATAKA HIGH COURT , the issue was answered in favour of the petitioner-assessee, where it was held 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.' Thus, 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 orders except stating that a registered supplier who has been found to be non-existent or not to be conducting business from his place of registration , no other reasons are forthcoming in the impugned orders. On this ground also, the impugned orders dated 28.02.2024 and 16.02.2024 deserves to be quashed. The impugned orders are set aside - petition allowed.

Issues Involved:

1. Blocking of the Electronic Credit Ledger (ECL) under Rule 86A of the Central Goods and Services Tax Rules, 2017.
2. Requirement of pre-decisional hearing before blocking the ECL.
3. Validity of reasons provided for blocking the ECL.
4. Reliance on borrowed satisfaction from other officers for blocking the ECL.

Detailed Analysis:

1. Blocking of the Electronic Credit Ledger (ECL) under Rule 86A:

The petitioner challenged the orders blocking their Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules. The court examined whether the conditions under Rule 86A were fulfilled for such an action. Rule 86A allows blocking of the ECL if there are "reasons to believe" that the Input Tax Credit (ITC) is fraudulently availed or ineligible. The court referred to the judgment in K-9-Enterprises Vs. State of Karnataka, which emphasized that the power to block ECL is drastic and requires strict compliance with the conditions outlined in Rule 86A. The court highlighted that the blocking of ECL should not be based on mere suspicion or borrowed satisfaction but must be supported by tangible material evidence.

2. Requirement of Pre-decisional Hearing:

The court noted that the petitioner was not provided with a pre-decisional hearing before the ECL was blocked. The judgment in K-9-Enterprises established that a pre-decisional hearing is a necessary procedural safeguard before taking such an action. The absence of a pre-decisional hearing was deemed a significant procedural lapse, warranting the quashing of the impugned orders. The court reiterated that procedural fairness is critical, especially when exercising powers that have severe implications for the taxpayer.

3. Validity of Reasons Provided for Blocking the ECL:

The court scrutinized the reasons provided in the impugned orders for blocking the ECL. It was found that the orders did not contain independent or cogent reasons to believe that the ITC was fraudulently availed or ineligible. The court emphasized that the reasons must be based on an independent inquiry and not merely on reports from other authorities. The impugned orders were criticized for being vague, cryptic, and lacking substantive reasoning, which is insufficient to justify such a drastic measure as blocking the ECL.

4. Reliance on Borrowed Satisfaction:

The court addressed the issue of reliance on borrowed satisfaction from other officers or authorities. The impugned orders were based on reports from the Enforcement authority without independent verification or inquiry by the officer responsible for blocking the ECL. The court held that this reliance on borrowed satisfaction is impermissible in law, as established in the K-9-Enterprises case. The decision to block the ECL must be based on the officer's own satisfaction derived from an independent assessment of the facts and evidence.

Conclusion:

The court concluded that the impugned orders blocking the ECL were procedurally flawed and substantively unjustified. The orders lacked a pre-decisional hearing, were based on borrowed satisfaction, and did not provide valid reasons for the action taken. Consequently, the court quashed the orders dated 28.02.2024 and 16.02.2024 and directed the respondents to unblock the petitioner's ECL. The court also granted liberty to the respondents to proceed against the petitioner in accordance with the law, following the principles laid down in the K-9-Enterprises case.

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