The applicant is engaged in the trading of MS(Iron) Scrap for 13 years. The firm purchases the scraps from different suppliers and sale them to different entities. In the case, the applicant is said to have purchased M.S. Scrap from one of its suppliers. The applicant has received the goods as well as tax invoices, weighment slips, e-way bills etc. which are the documents prescribed for the purchase as per law. The purchases made by it were duly reflected in the Form GSTR – 3B, Form GSTR – 2A and Form GSTR – 2B respectively.
Later someday, it came to the notice of the applicant through e-mail and SMS that the ITC worth ₹ 97,17,290/-for this particular purchase has been blocked by the GST Department under Rule 86A. On checking up with the GST Portal, it was displayed that the ITC had been blocked without assigning any reasons. When the applicant inquired on what basis, the ITC was blocked but, there was no response received. In such circumstances referred to above, the writ applicant is here before this Court with the present writ application.
The applicant submitted that it was expected to atleast convey the reasons in brief if not in detail, for blocking the ITC. They submitted that without any reasons how would a dealer come to know as to why his ITC has been blocked. If there is any information or material with the department to doubt the credentials of the supplier then for such reason alone, the ITC of the applicant could not have been blocked. The firm is a bona fide purchaser of the goods. The goods were delivered in accordance with law. The firm prayed for merit in his application, the allowance of the blocked ITC and action on the part of the for blocking the ITC and set aside.
On the other hand, GST Department submitted that having regard to the satisfaction arrived by the authority based on some information, it cannot be said that the action on the part of the authorities in blocking the ITC is illegal. The tax-payer was untraceable. It appeared that purchase had been made by different entity from the supplier and on checking the GSTN Portal, the GST number of the supplier was found suspended.
Rule 86A undoubtedly said to have the powers with proper officers if they have reason to believe that the activities or invoices are suspicious. The Rule 86A is based on “reason to believe”. It is a subjective term and can be interpreted differently by different individuals. Rule 86A does not look into the issue of any show-cause notice or intimation notice which means the person affected may be taken by surprise when he would go to the portal to pay taxes and finds that his ITC is not usable.
In one of the recent pronouncements in the case of Samay Alloys India Pvt. Ltd. Vs. State of Gujarat, consider the scope of Rule 86A more particularly, in a case where the balance in the electronic credit ledger is NIL. Therefore, it was decided in this case that the Rule 86A does not the entitles the proper Officer to make debit entries in the electronic credit ledger of the registered person. The Rule merely allows the proper officer to disallow the registered person the debit from the electronic credit ledger for the limited period of time and on a provisional basis.
The Court took the view that in case the debit entries are made by the proper Officer, the same would equal to permanent recovery of the input tax credit governed by the statutory provisions and it would certainly travels beyond the plain language and the underlined intent of Rule 86A.
Rule 86A has two pre-requisites to be fulfilled before the power of disallowing of debiting amount to the Electronic Credit Ledger or blocking of ECL. The first pre-requisite is of the Competent Authority or the Commissioner having been satisfied on the basis of the material available before him that blocking of ECL and the second pre-requisite is of recording the reasons in writing for such an exercise of the power.
The power under rule 86-A is an administrative power with quasi-judicial hues exhibited in the aforestated twin pre-requisites and has civil consequences for a tax payer in the sense, it acts as an obstruction to right of a tax payer to utilise the credit available in his ECL. It would mean that the power must be exercised fairly and reasonably by following the principles of natural justice. The power under rule 86A cannot be exercised unless there is a subjective satisfaction made on the basis of objective material by the authority.
The second pre-requisite of rule 86A is of recording of reasons in writing, that means, reasons must be recorded in writing in each and every case. Right to know the reasons behind an administrative order having civil consequences is a well embedded principle.
Rule 86A 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 un-utilised credit, is passed or otherwise the order of blocking the ECL under rule 86A would be unsustainable in the eye of law.
In a case, High Court held that law does not empower the tax authorities to reverse the ITC availed, on a plea that the selling dealer has not deposited the tax. It can revoke the input credit only if it relates to the incorrect, incomplete or improper claim of such credit.
At the end, the result was this writ application succeed in part and is partly allowed accordingly. The impugned order of blocking of the ECL of the writ applicant is hereby quashed and set aside. The respondents are at liberty to pass a fresh order under Rule 86A of the Central Goods and Service Tax Rules, 2017 in accordance with law and in the light of the observations made herein above.
