HC: Blocking ITC Without Independent “Reasons to Believe” is Unsustainable.

Issue

Can a jurisdictional officer legally block a taxpayer’s Input Tax Credit (ITC) under Rule 86A of the CGST Rules, based solely on a generic alert from the Directorate General of GST Intelligence (DGGI) that a supplier is “fake,” without conducting an independent inquiry or recording their own specific, written “reasons to believe”?

Facts

• The jurisdictional officer blocked the assessee’s (Pilcon Infrastructure) ITC in the Electronic Credit Ledger (ECL).
• The only reason recorded for this blockage was a cryptic note: “Supplier found non-functioning.”
• This action was not based on any independent inquiry by the officer. It was taken solely in reliance on a generic email or alert from the DGGI, which alleged that the supplier (M/s Maa Kamakhaya Trading) was non-operational and had issued bogus invoices.
• The DGGI’s investigation into the supplier was conducted ex parte (without their participation).
• No formal adjudication order or demand had been passed against either the supplier or the assessee, and the officer had no direct material linking the assessee to the alleged fraud.

Decision

• The Allahabad High Court quashed the order that blocked the ITC and directed the authorities to immediately unblock the credit.
• The court held that the officer failed to comply with the mandatory requirement of Rule 86A(1), which demands that the officer must have “reasons to believe” and must record those reasons in writing.
• Merely stating “Supplier found non-functioning” is not a valid reason; it is just a conclusion. It does not demonstrate any independent application of mind or satisfaction by the officer.
• The court ruled that an officer cannot justify blocking ITC based on “mere suspicion” or by “mechanically acting” on a third-party communication from the DGGI.
• The Revenue was given the liberty to initiate fresh proceedings only if credible, tangible evidence became available.

Key Takeaways

• Officer Must Record Own Reasons: The jurisdictional officer cannot simply “cut and paste” an allegation from an investigating wing like the DGGI. They must apply their own mind to the facts and record their own specific, tangible reasons for believing the ITC is fraudulent.
• DGGI Alert is Just “Information,” Not “Reasons”: An alert from the DGGI is merely “information.” It is not a substitute for the jurisdictional officer’s own “reasons to believe,” which must be formed based on material on record.
• No Blocking on Suspicion: The power to block ITC under Rule 86A is a drastic measure that disrupts the entire GST chain. It cannot be invoked based on borrowed satisfaction, generic alerts, or mere suspicion.
• Procedural Fairness is Non-Negotiable: This judgment reinforces that strict adherence to procedural safeguards (like recording specific, written reasons) is a mandatory prerequisite for invoking the power to block ITC.