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TMI Blog2022 (3) TMI 908X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - Any administrative power having quasi-judicial shades, which brings civil consequences for a person against whom it is exercised, must answer the test of reasonableness. It would mean that the power must be exercised fairly and reasonably by following the principles of natural justice. The provisions made in rule 86-A would require the Competent Authority to first satisfy itself, on the basis of objective material, that there are reasons to believe that credit of input tax available in ECL has been fraudulently or wrongly utilised and secondly to record these reasons in writing before the order of disallowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Petitioner to the tune of ₹ 97,17,290/ (Rupees Ninety Seven Lakhs Seventeen Thousand Two Hundred and Ninety Only) and after looking into the same and the legality thereof, this Hon'ble Court be pleased to quash and set aside the action of Respondent No.3 regarding blocking of Input Tax Credit of the Petitioner which has been shown on the login credential of GSTN portal of the Petitioner (Annexure-E); (b) That this Hon'ble Court be pleased to issue a Writ of Mandamus, or a Writ in the nature of Mandamus, or any other appropriate writ Order or direction to the Respondents to unblock the Input Tax Credit to the tune of ₹ 97,17,290/- (Rupees Ninety Seven Lakhs Seventeen Thousand Two Hundred and Ninety Only) of the Petitioner; (c) for ad-interim relief in terms of prayer (b) above; (d) for costs of the petition be provided; and (e) for such further and other reliefs, as this Hon'ble Court may deem fit and proper in the facts and circumstances of the case." 3. The facts giving to this writ application may be summarized as under: 3.1 The writ applicant is a proprietary concern. It is engaged in the trading of M.S. Scrap past 13 years. The propri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a bona fide purchaser of the goods. The goods were delivered in accordance with law. In such circumstances referred to above, Mr. Modh prays that there being merit in his writ application, the same be allowed and the impugned order/action on the part of the respondent no.3 in blocking the ITC be quashed and set aside. 5. On the other hand, this writ application has been vehemently opposed by Mr. Utkarsh Sharma, the learned AGP appearing for the respondents. Mr. Sharma would submit that having regard to the satisfaction arrived at by the authority based on some information/material, it cannot be said that the action on the part of the respondent no.3 in blocking the ITC is illegal. Mr. Sharma, upon the request made by this Court has made available the satisfaction note dated 28.07.2021. The English translation of the same reads thus: "With respect to the Letter No: XIV/001/2017 dated 12/07/2021 of Deputy Commissioner of State Tax (CGST & CE, DIV - I, Surat) and the Departmental Circular No - 19 dated 06/05/2020, Mr. Mohmadyusuf Abdulgafar Shaikh's M/s. New Nalbandh Traders (GSTIN - 24AMMPS4317A1ZA) claimed tax credit of ₹ 97,17,290/- from Mr. Dipakbhai Rathod's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 74(1). In case you wish to file any submissions against the above ascertainment, the same may be furnished within thirty (30) days in Part B of this form. Sd/- Assistant Commissioner of State Tax, Unit - 62, Surat." 7. Mr. Sharma would submit that the inquiry is in progress. He fairly conceded that although 7 months have elapsed, since the ITC came to be blocked yet, no show cause notice has been issued till this date under Section 73 or 74 respectively as the case may be. He would submit that the object of blocking the ITC in exercise of power under Rule 86A of the Rules is to protect the interest of the Revenue. In such circumstances referred to above, Mr. Sharma prays that there being no merit in this writ application, the same be rejected. 8. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is whether the respondent no.3 was justified in blocking the ITC under Rule 86A of the Rules. 9. Before adverting to the rival submissions canvased on either side, we must first look into the provisions of Rule 86A of the Rules. Section 86A reads thus: "Notif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.". 4. In the said rules, with effect from the 11th January, 2020, in rule 138E, after clause (b), the following clause shall be inserted, namely:- "(c) being a person other than a person specified in clause (a), has not furnished the statement of outward supplies for any two months or quarters, as the case may be." 10. Having referred to Rule 86A above, we must now look into Section 16 of the CGST Act. The same reads thus; "Section 16 - Eligibility and conditions for taking input tax credit (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed. (4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier. "Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit ledger is NIL. In Samay Alloys India Pvt. Ltd. (Supra), this Court took the view that the Rule 86A is not the Rule which entitles the proper Officer to make debit entries in the electronic credit ledger of the registered person. The Rule merely allows the proper officer to disallow the registered person the debit from the electronic credit ledger for the limited period of time and on a provisional basis. This Court took the view that in case the debit entries are made by the proper Officer, the same would tantamount to permanent recovery of the input tax credit and the permanent recovery is governed by the statutory provisions (Sections 73 or 74 respectively of the CGST Act as the case may be) and it would certainly travels beyond the plain language and the underlined intent of Rule 86A. 14. Rule 86A has two pre-requisites to be fulfilled before the power of disallowing of debit of suitable amount to the Electronic Credit Ledger or blocking of ECL to the extent of the amount fraudulently or wrongly availed of is exercised. The first pre-requisite is of the Competent Authority or the Commissioner having been satisfied on the basis of the material available before him that bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istence of reasons to believe that there is fraudulent or erroneous availment of credit standing in the ECL. In other words, the power under rule 86-A cannot be exercised unless there is a subjective satisfaction made on the basis of objective material by the authority. 17. 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 it's exercise (See Swadeshi Cotton Mills Vs. Union of India : (1981) 1 SCC 664 and Nirma Industries Limited and another Vs. Securities and Exchange Board of India : (2013) 8 SCC 20 ). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vil consequences is a well embedded principle forming part of doctrine of fair play which runs like a thread through the warp and weft of the fabric of our Constitutional order made up by Articles 14 and 21 of the Constitution of India. In the case of Andhra Bank V/s. Official Liquidator : (2005) 3 SCJ 762 , the Apex Court has held that an unreasoned order does not subserve the doctrine of fair play. It then follows that the word, "may" used before the words, "for the reasons recorded in writing" signifies nothing but a mandatory duty of the competent authority to record reasons in writing. 19. There is another reason which we would like to state here to support our conclusion just made. The power under rule 86- A is of enabling kind and it is conferred upon the Commissioner for public benefit and, therefore, it is in the nature of a public duty. Essential attribute of a public duty is that it is exercised only when the circumstances so demand and not when they do not justify its performance (see Commissioner of Police, Bombay Vs. Gordhandas Bhanji : AIR (39) 1952 Supreme Court 16). It would then mean that justification for exercise of the power has to be found by the authority by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances, it can be said that the case on hand is one of an arbitrary exercise of power under Rule 86A. 24. Before we close this judgment, we must observe something as regards Section 43A of the Act, 2018. 24.1 Rule 86A may subject a bona fide assessee to undue hardship by the blockage of his credit ledger due to the default of his supplier. This may tantamount to equating the default of the recipient with that of the supplier. Section 43A was inserted into the Act vide the CGST (Amendment) Act, 2018. Section 43A(6) provides that the supplier and the recipient of a supply shall be jointly and severally liable to pay tax, or to pay the input tax credit availed, as the case may be, in relation to the outward supplies. 24.2 However, section 43A has not been notified yet. Therefore, the same does not apply. In the absence of section 43A being notified, this power has not been contemplated by the Act. Further, the notification of rule 86A prior to the section 43A is indicative of the fact that the rule did not intend to draw the validity from section 43A. Thus, the blocking of a recipient's credit ledger on the account of default of a supplier, vide rule 86A, is wanting of statutory a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seeking special leave to appeal against this decision. 24.5 In Sri Vinayaga Agencies v. Assistant Commissioner, W.P. Nos. 2036 to 2038 of 2013, dated 29.01.2013 (Madras High Court), the Madras High Court held that law does not empower the tax authorities to reverse the ITC availed, on a plea that the selling dealer has not deposited the tax. It can revoke the input credit only if it relates to the incorrect, incomplete or improper claim of such credit. 24.6 The need for the law to distinguish between honest and dishonest dealers was acknowledged by the Punjab and Haryana High Court in Gheru Lal Bal Chand v. State of Haryana, Civil Writ Petition No.6573 of 2007, decided on 23.09.2011 where the constitutional validity of Section 8 of the Haryana DVAT Act, 2003 ('HVAT Act') was being considered. It was held that: "In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages imposing any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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