GST update No 150 on order to specify amount of credit blocked under Rule 86A

The GST Act was enacted with an objective of providing seamless, continuous and complete flow of input tax credit through out the transaction chain and to avoid the cascading effect faced by the business community. However, it seems that with the passage of time this ideology has faded and it has lost its importance. Also, introduction of Rule 86A has added another misery for an already miserable man. The departmental officers misuse the powers entrusted to them vide the introduction of this Rule and consequently, the bona fide taxpayer is unable to utilize his credit against his output tax liability. One such issue travelled upto Bombay High Court in the case of Dee Vee Projects Ltd. V/s Government of Maharashtra. The analysis of this decision is subject matter of our present update. The petitioner is a public limited company and is engaged in infrastructure development having its presence in various states. The company changed its registered address twice and therefore, sought amendment in registration certificate regarding “change of address”. The petitioner is a regular and responsible taxpayer regarding filing of return and making payment to the Government on a timely basis. The petitioner submitted that his Electronic Credit Ledger was working smoothly till 01.07.2022. However, after 01.07.2022, it was blocked by the Deputy Commissioner. Consequently, the assessee was not able to discharge his output liability and file returns. The petitioner therefore contended that blocking of credit ledger amount to illegal provisional attachment under Section 83 of CGST Act, 2017. Further, the petitioner also submitted that attachment can be initiated only by Commissioner under Section 2(24) of CGST Act, 2017. Various representations were also forwarded against the unlawful attachment of property but they were rejected by the departmental officers. The petitioner argues that the Section 83 is not applicable in their case and procedure as prescribed under Rule 86A was not followed appropriately. Furthermore, the action taken by officers is illegal and contrary to the provisions of Section 83 of CGST Act, 2017. The petitioner has termed the same as “unconstitutional” and ultra vires the of Constitution of India. The petitioner also submitted that power to attach credit ledger cannot be exercised without quantifying the amount of wrong availment of ITC. The assessee contended that it is a habit of the officers to invoke Rule 86A and therefore, appropriate guidelines should be issued by Government in this regard. Reliance was placed on Radha Krishan Industries Vs. State of Himachal Pradesh and others. The Counsel of the department argued that the action taken by the officer is in accordance with law since during investigation it was found that the petitioner has wrongly availed credit in its electronic credit ledger as the petitioner company was non existing and not carrying the business at the registered place. Further, the documents uploaded on the portal as address proof had a different address altogether. It was argued that the invoices showed the address from where the company never operated. Consequently, credit availed to the extent of Rs. 49.19 Crores in the credit ledger during July 2017 to Sept 2020 was fraudulent and illegal and therefore, liable to be recovered along with interest and penalty. The counsel further argued that there is delegation of power by the Commissioner and hence, there is no substance in the argument that the power exercised by Deputy Commissioner is beyond his jurisdiction. Further, Rule 86A of CGST Rules, 2017, itself contains conditions failing which power cannot be exercised and therefore, Court is not required to issue any direction related to prescribing any guidelines. Moreover, it was argued that Rule 86A does not requires any hearing to be granted but requires reaching of satisfaction by the authority. The Court held that Deputy Commissioner holds a rank over and above the Assistant Commissioner and therefore, the contention of petitioner regarding non-jurisdictional exercise of power is incorrect. The counsel of department was of the view that the Writ Petition is not maintainable since alternate remedy is available to the assessee. The Court held that the Writ Petition is maintainable since the Assessee can file appeal only against the matters defined in Act and not against Rule. It was further analyzed and stated that although the amount lying in credit ledger could be considered as the property of taxpayer but restricting the use of credit amount available in credit ledger cannot take the skin or character of seizure or attachment of property. Therefore, power under Rule 86A and Section 83 is distinct and order passed under 86A cannot be treated at par with order passed under Section 83 of CGST Act, 2017. Further, it was held that the reference of the decision given by the petitioner is not applicable in the given case. It was held that the departmental authorities cannot block the ECL amount more than the amount found to be fraudulently or wrongly availed. Further, as per the pre-requisites of Rule 86A, the departmental authorities must have reason to believe and is satisfied on the basis material evidence and have reasons recorded in writing regarding blockage of the amount of credit ledger. It cannot be made on the flight of one’s fancies and whims or imagination. Failing which will violate the principle of natural justice and shall be unconstitutional as per Article 14 of the Constitution. Reliance was placed on Maneka Gandhi Vs. Union of India : AIR 1978 SC 597. Further, the authorities should grant an opportunity of hearing and then take any action against the taxpayers. Reference can be made on Swadeshi Cotton Mills Vs. Union of India : (1981) 1 SCC 664 and Nirma Industries Limited and another Vs. Securities, Exchange Board of India : (2013) 8 SCC 20), M/s HEC India LLP Vs. Commissioner of GST and Central Excise Audit-II and another (WA No.2341 of 2021 dated 16.09.2021). In the present case, the authorities imposed a blanket prohibition upon utilization of credit without substantiating the amount to the extent to which credit ledger has been blocked. Further, there was independent application of mind by the authority who invoked Rule 86A of CGST Rules, 2017. Reliance was placed in this regard on Chandra Kishor Jha V/s. Mahavir Prasad, AIR 1999 SC 3558 and Dhananjay Reddy V/s. State of Karnataka, AIR 2001 SC 1512. Therefore, it was held that impugned order is arbitrary and illegal. The fight with the department regarding invoking of Rule 86A of CGST Rules, 2017 is a never-ending fight. The track record showcases that there had been numerous cases still lying on the said subject matter in the court of law. The revenue authorities are reluctant to change their practices and consequently invoke Rule 86A on flimsy grounds. Recently one such issue arose in front of Madras High Court in the case of HEC India LLP V/s Commissioner of GST and Central Excise Audit- II wherein it was held that the authorities need to communicate reasons for blocking ITC of the taxpayers. The above judgment would bring a sigh of relief to the genuine taxpayers and accordingly reduce the undue hardships faced by the taxpayers

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GST update No 150 on order to specify amount of credit blocked under Rule 86A

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