An order blocking an ITC ledger is invalid if it does not contain any reasons.

An order blocking an ITC ledger is invalid if it does not contain any reasons.

Issue

Is an order blocking a taxpayer’s Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules legally valid if the order itself does not record any “reason to believe” or provide any justification for taking such a drastic action?

Facts

• The GST department blocked the petitioner’s Electronic Credit Ledger under the powers of Rule 86A.
• The blocking order was completely non-speaking, meaning it did not contain any recorded reasons to justify the officer’s belief that the credit was fraudulent or ineligible.
• The department had previously issued summons to the petitioner seeking documents related to supplies from a specific entity, but the petitioner, after appearing once, had not fully complied.
• The petitioner challenged the blocking order directly in a writ petition, arguing it was passed without due process. During the court hearing, the department agreed to grant a fresh hearing.

Decision

The High Court ruled in favour of the assessee and remanded the matter.

• It held that the absence of recorded reasons in the blocking order was a fatal flaw and a clear violation of the principles of natural justice, warranting the court’s interference.
• The impugned blocking order was set aside, but this relief was made conditional. The petitioner was required to furnish a nationalized bank guarantee for ₹6.50 crores to secure the revenue’s interest.
• The matter was sent back to the department with a direction to grant the petitioner a full opportunity to be heard and to pass a fresh, reasoned order within four months.

Key Takeways

1. “Reasons to Believe” is a Mandatory Prerequisite: The power to block an ITC ledger under Rule 86A is a drastic one. It can only be exercised if the officer has a “reason to believe” that the credit is fraudulent or ineligible, and these reasons must be recorded in writing. An order passed without recording any reasons is invalid.
2. A Non-Speaking Order Violates Natural Justice: A fundamental principle of administrative law is that any order that has adverse consequences for a person must be a “speaking order,” meaning it must contain the reasons for the decision. A non-speaking order is considered arbitrary.
3. Conditional Relief Balances Interests: Courts often use conditional orders to balance the interests of both parties. In this case, the court provided relief to the taxpayer by unblocking their credit ledger but also protected the revenue’s interest by requiring a substantial bank guarantee pending the final outcome.
4. Remand for a Fair Hearing: The standard judicial remedy for an order passed in violation of natural justice (like a non-speaking order) is to set it aside and remand the case for a fresh and fair hearing, where the proper procedure can be followed.