ORDER
R. Raghunandan Rao, J. – Heard Sri P. Venkata Prasad, learned counsel appearing for the petitioner and Smt. Santhi Chandra, learned Standing Counsel appearing for CBIC.
2. The petitioner, who is registered, under the Goods and Services Tax Act 2017 [for short “the GST Act”], had been paying its taxes, either by way of payment of cash or by utilizing the input tax credit, which is available in its electronic credit ledger.
3. The 2nd respondent, by proceedings in reference No.BL3703240000056, dated 20.03.2024, had blocked the electronic credit ledger of the petitioner to an extent of Rs.19,73,299/-, by invoking Rule-86A of the Central Goods & Services Tax Rules, 2017 [for short “the Rules, 2017”].
4. This action of the 2nd respondent is challenged by the Writ Petitioner, on various grounds. The said grounds, as reiterated by the learned counsel for the petitioner, are as follows:-
(a) | | Rule-86A of the Rules, 2017, permits blocking of credit, which is actually available in the electronic credit ledger. The learned counsel for the petitioner submits that there was no input tax credit available in the electronic credit ledger of the petitioner, as on the date of the blocking order and consequently, Rule-86A of the Rules, 2017, could not have been invoked. He relies upon the Judgments of various High Courts in the cases of Samay Alloy India Pvt. Ltd. v. State of Gujarat 2022 (61) G.S.T.L. 421 (Guj), Best Crop Science Pvt. Ltd. v. Principal Commissioner, CGST Commissionerate, Meerut (2024) 22 Centax 531 (Del), PMW Metal and Alloys Pvt. Ltd. v. Union of India (91) Centax – G.S.T.L. 4 (Centax – Guj.), Laxmi fine Chem v. Assistant Commissioner 2024 (87) G.S.T.L. 197 (Telangana), New Nalbandh Traders v. State of Gujarat 2022 (66) G.S.T.L. 334 (Guj.) and Deem Distributors Pvt. Ltd. v. Union of India 2022 (56) G.S.T.L. 282 (Telanagana). |
(b) | | The term “availed’ means the input tax credit taken in the monthly returns and credited to the electronic credit ledger, under the GST, which may or may not be utilized either in payment of the same month or the subsequent month. |
(c) | | The power, under Rule-86A of the Rules, 2017, cannot be used in a routine manner, and it is an extraordinary power granted for protection of revenue. This would require the authority, exercising such power, to look at the past conduct of the petitioner, including the payment of taxes, made by the petitioner. |
(d) | | The proceedings under which, the power under Rule-86A of the Rules, 2017 has been invoked, does not contain any reasons except to state that the input tax credit from fake persons has been utilized. This bald statement does not amount to recording of proper reasons against which an appeal could be filed. |
(e) | | The subsequent information, obtained from the 2nd respondent, is to the effect that the said proceedings had been issued by the 2nd respondent on the directions of the commissioner and such a course of action is not available. Learned counsel for the petitioner also relies upon the Judgment of the Hon’ble Supreme Court of India in the case of M/s. Radha Krishan Industries v. State of Himachal Pradesh 2021 (48) G.S.T.L. 113 (S.C.), for this proposition. |
(f) | | Rule-86A of the Rules, 2017, requires authorization to be obtained from the commissioner, before the 2nd respondent could have involved the said provision. The authorization produced by the 2nd respondent is not an authorization from the commissioner and as such, the order is without jurisdiction. |
(g) | | The authorization, which has been produced by the 2nd respondent, is not a specific authorization as it includes various other persons and is a general authorization, which does not meet the requirements of the Rule-86(A) of the Rules, 2017. |
5. Smt. Santhi Chandra, learned Standing Counsel appearing for the respondents, opposed the contentions raised by the learned counsel for the petitioner, in the following manner.
(a) | | Rule 86A of the Rules, 2017 permits blocking of input tax credit, which was utilized wrongfully, even after necessary input tax credit amount is not available, on the date on which the input tax credit is blocked. She relies upon the judgment of the Hon’ble High Court at Calcutta in the case of Basanta Kumar Shaw, Propreitor of M/s. N.M.D. Engineering Works v. The Assistant Commissioner of Revenue, Commercial Taxes and State Tax, Tamluk Charge and Ors., rendered on 28.07.2022 in MAT 976 OF 2022 with CAN 1 of 2022, and also the judgment of the Hon’ble High Court of Allahabad in R.M. Dairy Products LLP v. State of U.P. and Ors., dated 15.07.2021 in Writ Tax No.434 of 2021. |
(b) | | The exercise of power, under Rule 86A of the Rules, 2017 was done on the ground that the input tax credit, which was utilized by the petitioner, had been obtained from non-existent fake entities. In such a case, the fact that the petitioner was, earlier, paying taxes cannot be a ground to refrain from exercising the power under Rule 86A of the Rules, 2017. |
(c) | | The exercise of power under Rule 86A was intimated to the petitioner, through the portal of the respondents. Since there is a physical limit on the reasons that can be set out in the said portal, a brief explanation was set out in the portal. Subsequently, a detailed note setting out the details of the fake entities etc., was sent to the petitioner. In such circumstances, the contention of the petitioner that no reasons had been set out or that proper reasons have not been recorded is incorrect. |
(d) | | The contention of the petitioner, that the 2nd respondent had invoked the power, under Rule 86A of the Rules, 2017, only on the ground that the commissioner had directed such invocation, is incorrect. The petitioner, except making such a statement, has not placed any material before this Court to show that the impugned action of the 2nd respondent was at the sole instance of his superiors and he has not applied his mind to the issue. |
(e) | | The contention of the petitioner that, the required authorization, had not been, from the Commissioner, is incorrect and the proceedings granting such authorization have already been filed before this Court. |
(f) | | The contention of the petitioner that the authorization produced before this Court is a general authorization, which does not meet the requirements of Rule 86A of the Rules, 2017, is also incorrect as the language of the said Rule, requiring authorization, has been complied with. |
6. Before going into the interpretation of Rule 86A of the Rules, 2017, it would be appropriate to consider the other objections and grounds raised by the petitioner, in the background of the following facts:
7. The 1st respondent had issued an e-mail, dated 20.03.2024, informing the petitioner, that the input tax credit (ITC) of Rs.19,73,299/- has been blocked by the Assistant Commissioner, Administration. The reasons given for such blockage of ITC was that the ITC was obtained from fake and non-existent suppliers. On 26.03.2024, the petitioner had addressed a letter to the 1st respondent, acknowledging the aforesaid e-mail, and requiring further details and reasons for the said blockage of ITC. This was followed by another letter / e-mail, dated 03.04.2024 requiring details. It appears that even before the message, dated 03.04.2024, had been sent, the 1st respondent, by his communication, dated 01.04.2024, had stated that the ITC, on the basis of inward supply from one M/s. Prime Trading Company, was ineligible as the said ITC is on the basis of fake invoices without actual movement of goods, and had been done for the purpose of generating huge number of ITC for their buyers for setting off outward liability. In this communication, the petitioner was also called upon to pay / reverse the said ITC applicable on or before 15.04.2024.
8. In reply to this, the petitioner again sent a communication, dated 12.04.2024, to the 1st respondent, contending that such a blockage is unjustified. A follow up communication dated 12.04.2024 was also sent by the petitioner to the 1st respondent.
Consideration of the court:
9. Rule 86A of the Rules, 2017, reads as follows:
“86A: (1) The Commissioner or an officer authorized by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as –
(a) | | the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under Rule 36 – |
i. | | issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or |
ii. | | without receipt of goods or services or both; or |
(b) | | the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or |
(c) | | the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or |
(d) | | the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilized amount. |
(2) | | The commissioner, or the officer authorized 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.” |
10. This Rule permits the Commissioner, or an officer authorized by the commissioner, to exercise the power under this Rule. In this case, the authority to exercise the power under Rule 86A, was delegated, on 18.05.2023, on account of special All India Drive against the fake registrations, to Sri G. Sunil, the Assistant Commissioner, for Kurnool and Ananthapur divisions, In the said circumstances, the contention of the petitioner that there was no proper delegation of power would have to be rejected.
11. The petitioner contended that the exercise of power, by the 2nd respondent, Assistant Commissioner of Tax, was at the direction of the Commissioner, is not supported by any material before this Court. None of the proceedings and documents, produced by the petitioner, before this Court, makes out any such direction by the Commissioner, requiring the 2nd respondent to simply block ITC of the dealers, such as, the petitioner herein. The petitioner has produced a proceeding of the Joint Commissioner, in which the 2nd respondent was informed that the list of fake / suspicious units had been received and it is necessary to cause verification and blockage of recovery of inadmissible ITC. For this purpose, the 2nd respondent was directed to conduct a physical verification to be scheduled between 22.05.2024 to 29.05.2024. The direction, in these proceedings, was to ascertain facts and to take action accordingly. There is no direction to block, the credit ledger, without any exception. It may be noted that ITC of the petitioner was blocked in March, 2024 and this proceeding has no relevance. Accordingly this contention of the petitioner is also rejected.
12. The petitioner’s contention that the power under Rule 86A has been invoked without giving any reasons and without looking into the past conduct of the petitioner also requires to be rejected. Though the initial communication, dated 20.03.2024, had given a cryptic description of the reason for blocking ITC, the fact remains that the ground on which such ITC has been blocked can be made out. However, further details have also been given subsequently. In such circumstances, the contention, that no cogent reasons are given, cannot be accepted. It may also be noticed that the blocking of ITC does not amount to recovery of tax, but only stops the use of ineligible ITC. In such cases, the supply of reasons, initially in a cryptic manner, in the order, and subsequent elaboration, of those reasons, meets the requirement of principles of natural justice.
13. The language of Rule 86A came to be considered by various High courts. The Hon’ble High Court of Gujarat and the Hon’ble High Court of Telangana, appear to have taken the view that only such tax credit, which is available in the electronic credit ledger can be blocked. For this purpose, the authority would have to first verify whether there is any ITC available in the electronic credit ledger, at the time when ITC is sought to be blocked. It is only after it is found that there is ITC available in the electronic credit ledger that an order under Rule 86A can be issued. On the contrary, the Hon’ble High court of Allahabad and Hon’ble High Court of Calcutta have taken the view that there is no such restriction.
14. In view of these conflicting opinions, it would be appropriate that this Court, without reference to these judgments, takes its own view, on the interpretation of Rule 86A.
15. The first part of Rule 86A (1) reads as follows:
“86A: (1) The Commissioner or an officer authorized by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as –
16. This would mean that, Rule 86A would come into play when, (a) there was input tax credit available in the electronic credit ledger; (b) that credit has been availed; and (c) it has been availed fraudulently or it was availed even though it was ineligible to avail such credit. Consequently, Rule 86A would come into play only after the input tax credit has already been availed.
17. The second part of Rule 86A, which is clause (d) of sub section (1), reads as follows:
“the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilized amount”.
18. There is divergence of opinion, as to the meaning of the language in this part of the Rule. The Hon’ble High Courts of Gujarat and Telangana have taken the view that it is only Input Tax credit, which is actually available, in the electronic credit ledger, at the time of the order of blockage, which can blocked. The Hon’ble High Courts of Calcutta and Allahabad have held otherwise.
19. A plain reading of the rule, permits the authority not to allow debit or refund of an amount equivalent to “such credit”. This part of the Rule does not use the term, “such credit which is available”. The language is restricted to “such credit”. The term “such credit” can only mean the credit which has been created, wrongfully, by any of the means set out in sub-clauses (a) to (d) of Rule 86A (1). We are unable to accept the interpretation that the term “such credit” means the credit which is actually available in the credit ledger.
20. Rule 86A (1)(d) stipulates that the appropriate authority, after giving reasons to be recorded in writing, may disallow debit of an amount equivalent to such credit in the electronic credit ledger, either for discharge of any liability or for claim of any refund of an unused amount. The reasons, that need to be set out in the order of blockage, would have to indicate why the order of blockage is being issued. In the present case, the initial order carried only the basic ground. The learned standing counsel contends that the system, in the GST portal, does not provide enough space to set out elaborate reasons. Due to this difficulty, the basic reason was set out and the subsequent communications gave more elaborate reasons. The reasons set out in the GST portal, barely pass muster. This appears to be a case where, technology, instead of assisting the cause of justice, is actually hindering it. It is time that the authorities took note of this fact, and made necessary changes to ensure that there is no space constraint, in the recording of reasons, passed in the GST portal.
21. To sum up, the scheme of this Rule is to put aside such amount of input tax credit, which has been wrongfully utilized, whether it is actually available in the credit ledger or not, and to await an appropriate order of assessment and penalty, if any, either under Section 73 or Section 74 of the GST Act, read with Section 122 of the GST Act. In view of this interpretation, we are unable, with all due respect, to agree with the view taken by the Hon’ble High Court of Gujarat or the Hon’ble High Court of Telangana. We respectfully agree with the view taken by the Hon’ble High Court of Allahabad and the Hon’ble High Court of Calcutta.
22. In this view of the matter, we do not find any merit in the present writ petition. Accordingly, this writ petition is dismissed. There shall be no order as to costs. As a sequel, pending miscellaneous petitions, if any shall stand closed.