GST Update No 210 on blocking ITC for no reason to believe that ITC is availed fraudulently

Constitutional Validity of Rule 86A under CGST Act, 2017, has been a matter of debate and discussion from very long wherein the powers of departmental authorities are widened and increased manifold. However, it is well known fact that right to avail and utilize Input Tax Credit for discharging tax liability is the legal right of the assessee arising from the statue. Yet, the tug of war remains the same between the department and the taxpayers denying the input tax credit. On the similar lines, one case was reported by hon’ble Punjab and Haryana High Court in the case of RAJNANDINI METAL LTD. VERSUS UNION OF INDIA wherein question raised was related to invocation of Rule 86A of CGST Rules, 2017. The decision imparted in this case is subject matter of discussion of our present update.

The petitioner is a public limited company and is engaged in manufacturing of copper wire rod and submersible winding wire. The respondent blocked input tax credit amounting to Rs. 1.9 Crores in the electronic credit ledger as on 02.09.2021. The petitioner submitted written submissions on 10.12.2021 which were subsequently rejected by the respondent.

The Counsel of petitioner submitted that the action is initiated in this respect on the basis of communication received from Delhi North Commissionerate as per which one of the suppliers i.e. M/s Bhagwati Metals is non-existing. It was further submitted that Show Cause Notice for cancellation of registration was issued to Bhagwati Metals on 05.02.2021 which was however, dropped on 23.02.2021 and therefore, the registration was suspended. Therefore, it was submitted that since the basic proceedings initiated against the supplier is withdrawn, there is no reason to believe that input tax credit should be blocked under Rule 86A of CGST Rules, 2017. It was further contended that the said Rule is only a preventive measure to secure the interest of revenue. Furthermore, the mis-appropriation or fraud is committed by supplier of petitioner and therefore, petitioner cannot be deprived of his valuable right of ITC failing which will result into violation of Article 21 of the Constitution.

The Counsel of respondent submitted that the proceedings initiated against Bhagwati Metals were dropped on 23.02.2021 which were initiated back again and GSTN was cancelled thereafter on 27.07.2021. IT was further argued that the petitioner was part of a chain/racket involved in generation and passing of Input Tax Credit from different suppliers.

The Court held that the respondent has invoked Rule 86A of CGST Rules, 2017 which can be exercised where the officer has reason to believe that the input tax credit is availed fraudulently. The exercise of this right is subject to satisfaction of the departmental authority. Reliance was placed on the decision of Gujarat High Court in the case of M/S NEW NALBANDH TRADERS VS. STATE OF GUJARAT AND 2 OTHERS (R/Special Civil Application No.17202 of 2021 dated 23.02.2022). It was further stated that merely by recording that some investigations were going on, a drastic far-reaching action cannot be sustained. An independent application of mind can constitute as a reason to believe for exercising power under Rule 86A of CGST Rules, 2017. Therefore, the appeal was allowed.

The above decision is yet another example supporting the settled law that Rule 86A of CGST Rules, 2017, can be invoked only in case of existence of “Reason to believe” failing which it can be challenged as unreasonable and ultra-vires the provisions of the law. The same viewpoint has been upheld in catena of judgements. To illustrate in the case of M/S NORTH END FOOD MARKETING PVT. LTD. V/S STATE OF UP AND 4 OTHERS, hon’ble Allahabad High Court held that blocking of credit without reason to believe is invalid. The revenue authorities should invoke and exercise this power more judiciously failing which will increase the hardships faced by taxpayers and blockage of time and money of the Courts, Government and the taxpayers.

Comments

GST Update No 210 on blocking ITC for no reason to believe that ITC is availed fraudulently

Post a Comment

Query