2025 (1) TMI 251 - HC - GST

Blocking the Electronic Credit Ledger (ECL) of the petitioner under Rule 86A of the Central Goods and Services Tax Rules, 2017 (CGST Rules) - absence of a pre-decisional hearing - HELD THAT - The issue answered in favour of the petitioner- assessee in K-9-Enterprises s case 2024 (10) TMI 491 - KARNATAKA HIGH COURT 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.' 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 order 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 order. On this ground also, the impugned order dated 06.06.2024 deserves to the quashed. Conclusion - The impugned order is quashed, 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. Petition allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the impugned order blocking the Electronic Credit Ledger (ECL) of the petitioner under Rule 86A of the Central Goods and Services Tax Rules, 2017 (CGST Rules) was valid, given the absence of a pre-decisional hearing.
Whether Rule 86A of the CGST Rules is ultra vires the provisions of Section 16(2) of the Central Goods and Services Tax Act, 2017.
Whether the respondents-revenue had valid "reasons to believe" that justified the blocking of the ECL under Rule 86A.
Whether the impugned order was based on independent reasoning or merely on borrowed satisfaction from another authority's report.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the Impugned Order under Rule 86A

Relevant legal framework and precedents: Rule 86A of the CGST Rules allows for the blocking of the ECL if there are "reasons to believe" that the Input Tax Credit (ITC) was fraudulently availed or is ineligible. The judgment in K-9-Enterprises Vs. State of Karnataka was pivotal in this case, setting a precedent that a pre-decisional hearing is necessary before blocking the ECL.
Court's interpretation and reasoning: The court emphasized that the absence of a pre-decisional hearing and lack of independent reasons to believe rendered the impugned order invalid. The court noted that the order relied on reports from enforcement authorities without independent verification.
Key evidence and findings: The impugned order lacked specific reasons beyond stating that a registered supplier was non-existent or not conducting business from the registered place.
Application of law to facts: The court applied the principles from K-9-Enterprises, concluding that the order was based on borrowed satisfaction and lacked the necessary independent reasoning.
Treatment of competing arguments: The respondents argued for the validity of the order, but the court found their reliance on enforcement reports insufficient.
Conclusions: The impugned order was quashed due to the absence of a pre-decisional hearing and lack of independent reasons to believe.

Issue 2: Ultra Vires Nature of Rule 86A

Relevant legal framework and precedents: The petitioner argued that Rule 86A was ultra vires Section 16(2) of the CGST Act, which governs the conditions for availing ITC.
Court's interpretation and reasoning: The court did not specifically address the ultra vires argument in detail but focused on the procedural deficiencies in applying Rule 86A.
Key evidence and findings: The court's decision primarily rested on procedural grounds rather than the substantive legality of Rule 86A.
Application of law to facts: The court's decision was based on the improper application of Rule 86A rather than its legality.
Treatment of competing arguments: The court did not explicitly rule on the ultra vires argument, focusing instead on procedural issues.
Conclusions: The court did not find it necessary to declare Rule 86A ultra vires, as the order was quashed on procedural grounds.

3. SIGNIFICANT HOLDINGS

The court held that "a pre-decisional hearing was not provided/granted by the respondents before passing the impugned order," which was a significant procedural lapse.
The court emphasized that the impugned order "does not contain independent or cogent reasons to believe except by placing reliance upon the reports of Enforcement authority which is impermissible in law."
The court reiterated that "Rule 86A, which in effect is the power to block ECL, is drastic in nature" and requires strict compliance with all procedural requirements.
The court quashed the impugned order and directed the respondents to "unblock the Electronic credit ledger of the petitioner immediately."
The court allowed the respondents to "proceed against the petitioner in accordance with law" if they choose to do so, following the proper legal procedures.

The judgment underscores the importance of procedural fairness and independent reasoning in administrative actions affecting taxpayer rights under the GST framework. The court's decision reflects a commitment to ensuring that drastic measures like blocking an ECL are not taken lightly or without proper justification.

← Previous Next →