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TMI Blog2023 (8) TMI 170X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Basa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to lead and lead scrap. According to the petitioners, they have been purchasing the goods from the customers/dealers registered under the Act of 2017 and have been complying with the necessary Rules and Regulations governing the business under the GST Regime. The petitioners claim that they have purchased goods from the persons who are registered under the Act of 2017 and there is no fraud played by the petitioners in the transaction and without even affording an opportunity of hearing, respondent no.2 has abruptly issued the impugned orders blocking the ITC available in their electronic credit ledger. Being aggrieved by the same, the petitioners are before this Court. 3. Learned Counsel for the petitioners submits that the impugned orders have been issued in violation of the principles of natural justice. He submits that the act of respondent no.2 is violative of the rights guaranteed to the petitioners under Articles 14 19(1)(g) of the Constitution of India. He submits that even if the persons from whom the petitioners have purchased the goods are assumed to be fraudulent, the petitioners cannot be punished for the same unless it is proved that the petitioners have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it ledger and blocking is only for a temporary period till the investigation is complete. In support of his arguments, he has placed reliance on the following judgments: (i) Judgment of the High Court of Calcutta in the case of BASANTA KUMAR SHAW, PROPRIETOR OF M/S. N.M.D. ENGINEERING WORKS VS THE ASSISTANT COMMISSIONER OF REVENUE, COMMERCIAL TAXES AND STATE TAX, TAMLUK CHARGE OTHERS, disposed of on 28.07.2022 in MAT 976/2022 with CAN 1/2022; and (ii) Judgment of Allahabad High Court in the case of M/S. R.M.DAIRY PRODUCTS LLP. VS STATE OF U.P. THREE OTHERS, disposed of on 15.07.2021 in Writ Tax No.434/2021. 5. Before adverting to the validity of the orders impugned in these writ petitions, in the background of the challenge made to the impugned orders, it may be necessary to mention what is an electronic credit ledger in the CGST and how the ITC is availed and utilized by the registered dealer. In this regard, it would be useful to refer to paragraphs 9 to 19 of the judgment in Samay Alloys India Pvt. Ltd.'s case supra, which gives a fair idea as to what is an electronic credit ledger in GST and how the ITC is availed and utilized by the registered dealer. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SGST output liability. (2) Then, the ITC standing under the IGST is used to set off the remaining SGST output liability. 14. Finally, the ITC is utilized in the following sequence to set off the IGST liability: (1) The ITC standing under the IGST is used to set off the IGST output liability. (2) The ITC standing under the CGST is used to set off the remaining IGST output liability. 15. Finally, the ITC standing under the SGST is used to set off the remaining IGST output liability. 16. Furthermore, no set off is available between the CGST and SGST. 17. Hence, from the above, it is clear how the electronic credit ledger is used while making the tax payment. What is Electronic Credit Ledger in GST? 18. The electronic credit ledger reflects the amount of Input Tax Credit available to the taxpayer. Thus, every claim of input tax credit of the registered taxpayer eligible for claiming such a credit is credited to this ledger. The amount available in the electronic credit ledger is utilized in making payments towards the outward tax liability by the registered taxpayer. 19. The electronic credit ledger shall be maintained in the form G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The heading of the provision of law or the marginal note can be always relied upon to clear any doubt or ambiguity in interpretation of the provision to discern the legislative intent. 8. 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. As stated earlier, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied, a proper officer can invoke Rule 86A. Upon invocation of Rule 86A, a proper officer can - a) Disallow debit from the electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount. b) Such restriction should be for an amount equivalent to the amount claimed to have been fraudulently availed or is ineligible. 10. In S.S.Industries case supra, the Division Bench of Gujarat High Court at paragraph 65 has observed as under: 65. Our final conclusions may be summarized as under:- (I) The invocation of Rule 86A of the Rules for the purpose of blocking the input tax credit may be justified if the concerned authority or any other authority, empowered in law, is of the prima facie opinion based on some cogent materials that the ITC is sought to be availed based on fraudulent transactions like fake/bogus invoices etc. However, the subjective satisfaction should be based on some credible materials or information and also should be supported by supervening factor. It is not any and every material, howsoever vague and indefinite or distant remote or far-fetching, which would warrant the forma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms indulging in fake judicial going-on a drastic far-reaching action under Rule 86A of the CGST Rules cannot be sustained. There is no reason recorded by the Authority for exercising power under Rule 86A of the CGST Act, 2017 which would show independent application of mind that can constitute reasons to believe which is sine qua non for exercising power under Rule 86A of the CGST Rules. It is trite law that a speaking order has to be self sustainable and respondents at this stage cannot be allowed to justify the same by adding reasons to it by filing additional affidavits. From the reading of the order, it is evident that it is bereft of any material or 'reason to believe' that the petitioner is guilty of fraudulent transaction or is ineligible under Section 16 of the CGST Act. 13. From the aforesaid, it is evident that 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Enterprises GSTIN: 29BAYPN2343E1ZB has availed fraudulent or ineligible ITC availed from registered person/s who has been found non-existent or not to be conducting any business from any place for which registration has been obtained in contravention of the above provisions. Therefore, it is hereby ordered to block the Input Tax Credit wrongly availed by the taxpayer as discussed in the preamble. Details are as under: Period IGST SGST CGST Cess Total Total ITC blocked Rs.30,88,089/- 0 0 0 Rs.30,88,089/- Hence, the total ITC Blocked is Rs.30,88,089/- (Rupees Thirty Lakhs Eighty Eight Thousand Eighty Nine only). 15. In the impugned order, prior to the culled down portion, reference is made to the field visit report of the Assistant State Tax Officer, Vasco-D-Gama, Goa, and thereafter, in the preamble, Section 16(2) of the Act of 2017 and Rule 86A of the Rules of 2017 have been quoted, and thereafter, the aforesaid culled dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d what is stated is that the Competent Authority may not allow debit of an amount equivalent to an amount determined or found to be fraudulently or wrongly shown as credit available in the ECL for discharge of any liability under Section 49 or any equivalent refund of an unutilized amount of credit in the ECL. Disallowing debit of an amount to the ECL is nothing but blocking of the ECL. But, such blocking of the ECL cannot be for an amount which is more than the amount found to be fraudulently or wrongly availed of. The answer to the second question, therefore, is that rule 86-A of Rules, 2017 does permit dis-allowance of debit of an amount to the electronic credit ledger only to the extent of fraudulent or wrong availment of credit in the ECL and such disallowance can be done through blocking of the ECL to the extent of the amount fraudulently or wrongly shown as lying in credit in the ECL. 17. The Bombay High Court in the aforesaid case principally held that, the competent authority before invoking the power under Rule 86A of the Rules of 2017, is required to satisfy himself that the two important pre-requisites of the Rule is fulfilled before the power of blocking the elec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airly and reasonably by following the principles of natural justice. 20. If the impugned order which is assailed in these writ petitions is examined in the aforesaid background, it can be said that respondent no.2 before issuing the impugned order has arrived at a subjective satisfaction on the basis of the material available before him which he has referred to in the impugned order. The details of such material is not required to be provided or put forward by the competent authority at this stage as the investigation is still in progress. The said material is required to be considered only by the competent authority for his subjective satisfaction and if the court finds that such material are available on record, the first pre-requisite for invoking Rule 86A of the Rules of 2017 can be said to have been fulfilled. 21. 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 obtain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of above principles of law, 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 disallowing debit of requisite amount to the ECL or requisite refund of unutilised credit, is passed or otherwise the order of blocking the ECL under rule 86-A would be unsustainable in the eye of law. This is also the view taken in the case of M/s HEC India LLP Vs. Commissioner of GST and Central Excise Audit-II and another (WA No.2341 of 2021 dated 16.09.2021), which commends to us. Then, as stated earlier, a remedial hearing followed by confirmation or revocation of the order would be necessary. 23. If the orders impugned in the present writ petitions are examined in the aforesaid background, the two basic pre- requisites for invoking Rule 86A of the Rules prima facie appears to have been fulfilled by respondent no.2. Considering the fact that the impugned orders have been issued based on the field visit report by the Assistant St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 has observed that the Rule does not contemplate any recovery of tax from an assessee and it only provide in certain situations and upon certain conditions being fulfilled, specified amount may be held back and be not allowed to be utilized by the assessee towards discharge of his/its liabilities on the outward tax or towards refund. It creates a lien without actual recovery being made or attempted. It is in this background in the said case, it has been held that Rule 86A of the Rules of 2017 is only a provision to secure the interest of the Revenue and not a recovery provision to be exercised upon fulfillment of conditions, and therefore, the Division Bench of Allahabad High Court held that there cannot be any violation of the principles of natural justice since the legislative enactment was being performed in a particular way as it was required to. 27. However, in the case of C.B.GAUTAM VS UNION OF INDIA OTHERS - (1993)1 SCC 78, the Hon'ble Supreme Court has held that the mere fact that reasons were required to be recorded in writing and the same will not substitute an opportunity of being heard and even if the Statute does not stipulate such a requirement, opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed therein, and so, we find that post decisional or remedial hearing would have to be granted to the person affected by blocking of his ECL. We may add that such post decisional hearing may be granted within a reasonable period of time which may not be beyond two weeks from the date of the order blocking the ECL. After such hearing is granted, the authority may proceed to confirm the order for such period as may be permissible under the rule or revoke the order, as the case may be. 29. The power under Rule 86A of the Rules of 2017 is of an enabling kind and it is conferred on the competent authority to secure the interest of the Revenue. The said power is exercised by the competent authority on the basis of the material made available to him pending investigation, and therefore, as stated earlier, the order passed under Rule 86A of the Rules of 2017 is virtually provisional in nature. When an assessee who faces serious hardship and civil consequences as a result of the said orders, raises a plea that invoking of the drastic power under Rule 86A was unwarranted and the same was done without holding a proper enquiry and the action was initiated based on a report which is not sou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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