HC Orders Time-Bound Adjudication, Links Release of Blocked ITC to Department’s Compliance.

HC Orders Time-Bound Adjudication, Links Release of Blocked ITC to Department’s Compliance.

Issue

Whether a taxpayer is entitled to copies of all “relied-upon material” (even if “confidential”) that forms the basis of a Show Cause Notice (SCN), and whether a court can link the continuation of an Electronic Credit Ledger (ECL) blockage to the department’s adherence to a strict adjudication timeline.

Facts

• The petitioner received a Show Cause Notice (SCN) demanding approximately ₹1.79 crore.
• The SCN alleged that the petitioner had availed Input Tax Credit (ITC) on supplies from three entities that were stated to be “non-existent.”
• The department’s allegations were based on material and investigations sourced from other States.
• Simultaneously, the department froze the petitioner’s Electronic Credit Ledger (ECL) under Rule 86A.
• The petitioner filed a writ petition with three main grievances:
  1. To quash the SCN itself.
  2. To demand copies of the “relied material,” which the department had refused to provide, citing the confidentiality of third-party information.
  3. To lift the block on their ECL, which had brought their business to a standstill.

Decision

The High Court delivered a three-part decision that balanced the Revenue’s investigative powers with the taxpayer’s right to natural justice:

1. Challenge to SCN (In Favour of Revenue): The court refused to quash the Show Cause Notice. It held that an SCN is only a preliminary step, and the petitioner would have an adequate opportunity to rebut the allegations during the adjudication process.
2. Disclosure of Evidence (In Favour of Assessee): The court held that the department’s refusal to supply the relied-upon material was “untenable.” It affirmed that a person being adversely affected is entitled to all material used against them to enable a proper rebuttal. Denying this is a clear violation of the principles of natural justice.
3. Blocking of ECL (Partly in Favour of Assessee): The court refused to lift the ECL block immediately, given the “severe allegations” concerning non-existent suppliers.
   • The Remedy: Instead, the court created a strict, time-bound adjudication process. It directed the department to furnish all relied material within one week, the petitioner to reply within one week of receipt, and the authority to complete the entire adjudication (hearing and final order) within three weeks thereafter.
   • The Default Clause: The court ordered that if the department failed to complete this process within the stipulated time, the attachment on the ECL would be automatically lifted.

Key Takeaways

• Natural Justice Over Confidentiality: The department cannot hide behind “confidentiality of third-party information” to deny evidence to the very person being accused based on that evidence. This is a fundamental violation of the right to defense.
• Writ Court Won’t Quash a Valid SCN: High Courts are extremely reluctant to interfere at the SCN stage. The proper course for a taxpayer is to reply to the notice, not to challenge the notice itself in a writ.
• A Time-Bound Remedy for Blocked ITC: This ruling provides an important precedent. When ITC is blocked under Rule 86A, the court can link the continuation of the block to the department’s speedy completion of the adjudication.
• “Automatic Lifting” Clause: By imposing an “automatic lifting” clause, the court prevents the department from indefinitely blocking a taxpayer’s credit ledger while also delaying the final adjudication.