GST update No 153 on Rule 86A- A never ending saga

The discretionary power given to the GST authorities for blocking the input tax credit in the electronic credit ledger of the assessee is draconian as it seeks to snatch the vested right of credit utilisation available to them. There have been number of decisions pronounced by High Courts concluding that the power should be exercised cautiously with due diligence and the revenue authorities cannot block the electronic credit ledger for period exceeding one year. However, the provision contained in Rule 86A is not free from disputes and another issue was recently raised before the hon’ble Gujarat High Court in the case of SAMAY ALLOYS INDIA PVT. LTD. wherein it was asked that whether it is possible to block the electronic credit ledger even when there is no balance available thereon. The detailed analysis of the decision is subject matter of our present update. The petitioner is a private limited company registered in GST, engaged in the business of manufacture and sale of MS Billet. It was submitted that when the petitioner attempted to file return for September 2021, there was no credit balance available in the credit ledger. It was blocked by the revenue authorities and further, a negative balance was entered by the authorities. The petitioner filed a letter in this respect to the department, but it was unanswered. The Counsel argued that in case negative balance is displayed in credit ledger, additional liability of tax would arise on the account of petitioner. Further, it was submitted that the credit ledger was having NIL balance on date of submission and therefore, Rule 86A cannot be invoked. There should be eligible credit available in the electronic credit ledger for blocking the same. The authorities have no power to of negative blocking of credit which shall be available in future. Moreover, the petitioner contended that invoking of Rule 86A in present case amount to recovery made u/s 73 & 74 of CGST Act, 2017 which is not at all permissible. The Counsel of the Department contended that invoking of Rule 86A does not amount to recovery u/s 73 & 74 of CGST Act, 2017 since amount remains in the account of petitioner till final adjudication and only debits are not permitted. Furthermore, it was submitted that Rule 86A remains applicable since the powers of authorities are not limited to available balance on the day of default in credit ledger. The counsel contended that the Rule uses the words “equivalent to such credit” instead of “equivalent to available credit”. Further, it is analyzed the maintenance of credit ledger is a continuous exercise wherein the ITC amount gets accumulated and utilized by registered person and therefore, not permitting debit of amount cannot be treated at par with non-availability of balance. References were made to M/S S.S. INDUSTRIES VERSUS UNION OF INDIA. The department cited different eventualities in support of its contentions. The Counsel while arguing emphasized on phrase “may, for reasons to be recorded in writing, not allow debit of an equivalent amount in the electronic credit ledger”. The Court held that Rule 86A allows the Commissioner or subordinates to freeze the debit amount in credit ledger provided reasons to believe are established. On the contrary, insertion of negative balance by the revenue authorities is illegal and erroneous. Further, to invoke the rule, conditions prescribed are required to be fulfilled. It was stated that Rule does not allow authorities to make debit entries in credit ledger on a provisional basis and hence, it does not tantamount to permanent recovery u/s 73 & 74 of CGST Act, 2017. Reliance was placed on Rohtas Industries Limited Vs. Superintendent of Central Excise (2000) 123 ELT 124 wherein it was held that department cannot make changes in personal account of assessee i.e. in credit ledger. It was further held that the actual interpretation of the Rule would have been quite different in case the intention of the Government was to disallow future debits in the credit ledger. If the credit is availed and utilized fraudulently, the department can initiate proceedings u/s 29, 73, 74, 83 of the CGST Act, 2017. Additionally, it was stated that once the ITC is claimed, the credit becomes part of the pool and cannot be separately identified. Therefore, the Rule provides for restriction on equivalent amount and not the credit itself. It was concluded that the heading of Rule 86A i.e. “conditions of use of amount available in electronic credit ledger” itself suggests the scope and applicability of the Rule. It is a settled principle of Law that heading or marginal note can be relied upon to clear any doubt in the interpretation of the provisions. Reliance in this respect was placed on Apex Court’s decision Commissioner of Income Tax, Madras vs. Kasturi & Sons Ltd., (1999) 3 SCC 346 and Kapil Mohan vs. Commissioner of Income Tax, Delhi (1999) 1 SCC 450. Moreover, reliance was placed on clause 12 and 14 of Circular No. 4 of 2021 dated 24.05.2021 wherein it was stated that in case of NIL balance in credit ledger, balance in another head can be blocked only if cross-utilization is permissible in law. Credit cannot be blocked as cross utilization of CGST and SGST head is not permissible and there is zero balance in credit ledger. It was held that contention of department regarding non-usage of word “available” does not make any difference. Reliance was placed on High Court decision in the case of S.S. Industries vs. Union of India, reported in (2021) 87 GSTR 71 (Guj.). Therefore, it was concluded that the department have negligently exercised their power and therefore cannot block the negative credit in the credit ledger. The applicant was awarded with a refund of Rs 20 Lakhs deposited by them. There had been various cases on the same subject line wherein departmental authorities have taken harsh steps against the assessee by invoking Rule 86A. Recently, one such issue was raised in the case of Dee Vee Project Limited wherein Bombay High Court held that the department cannot block the credit based on flimsy grounds and there should be proper application of mind before exercising this provision. Further, it was held that the order of blocking credit must specify amount of ITC fraudulently earned. Time and again the revenue authorities act against assessee by invoking Rule 86A causing unnecessary litigations and harassment to the taxpayers. It is imperative that the revenue authorities realize that the discretionary powers vested to them are to be judiciously exercised by them.

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GST update No 153 on Rule 86A- A never ending saga

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