GST Update No 224 on blocking of credit without recording reasons

The concept of blocking of credit in accordance with provisions of Rule 86A of CGST Rules, 2017, had been a matter of discussion since long as the powers of the revenue authorities to invoke the same has increased manifolds. The undue hardships faced by the honest recipient as regards to blocking of credit ledger due to default of supplier, tantamount to equating default of recipient with that of supplier. Further, insertion of Section 43A of CGST Act, 2017, has added fuel to the fire prescribing that both the supplier and recipient shall be jointly and severally liable for discharging their liability. The tussle between the departmental authorities and taxpayers in this respect remains intact which compels the assessee to knock the door of courts. One similar line, one of the case was reported before hon’ble Gujarat High Court in the case of M/S NEW NALBANDH TRADERS VS STATE OF GUJARAT. The decision imparted in this case is subject matter of our present update.

The petitioner is a proprietary concern and engaged in trading of M.S. Scrap wherein purchases and sales are made to different entities. The purchases made from one supplier i.e. M/s Anmol Enterprises were duly received along with invoices, e-way bills etc. and were reflected in GSTR-2A as well. However, upon checking it was noticed that input tax credit of Rs. 97 Lakhs was blocked by the departmental authorities without assigning any reasons. Upon enquiry for reasons, no response was received by the petitioner.

The Counsel of the petitioner argued that the departmental authorities have erred in their approach since no reasons were conveyed to the petitioner failing which the dealer would not be able to know reasons of blocking of credit and furnishing reply thereof. It was further conveyed that the petitioner is a bona fide purchaser of the goods and should not be penalised for the default of the supplier.

The Counsel of revenue submitted that the authority arrived at this conclusion on the basis of some vital information in his possession. Furthermore, intimation in DRC-01A sent to the petitioner was also submitted before the Court. It was argued that Rule 86A is invoked to protect the interest of the revenue only.

The Court analysed the provisions of Rule 86A of CGST Rules, 2017 along with Section 16 and 43A of CGST Act, 2017. It was held that Rule 86A confers drastic powers to the proper officers to block the credit if they have reason to believe to do so. Although, it is a rational term which can be interpreted independently. Reliance was placed on the decision of same bench in the case of Samay Alloys India Pvt. Ltd. Further, it was stated that Rule 86A would be invoked provided two pre-requisites are fulfilled i.e. the authority must have reasons for blocking of credit and secondly reasons are to be recorded in writing before exercising of power. It was further stated that provisions of Rule 86A of CGST Rules, 2017 cannot be invoked merely on the basis of whims or imaginations since it is an administrative power and acts as an obstruction to right of taxpayer to utilise the credit available in ledger. Further, it must satisfy the test of reasonableness and must be exercised fairly and reasonably. Reliance in this respect was placed on decision of Maneka Gandhi Vs. Union of India : AIR 1978 SC 597. Further, principles of natural justice are required to be followed, which however may differ from case to case. It was held that as far as second leg of requirement is considered, Rule 86A can be invoked provided reasons of the same are recorded in writing. The use of word “may” has to be interpreted as “must be recorded” since invoking the said rule brings adverse consequences upon the person against whom the order is passed. Importance to the concept of “Doctrine of Fair Play” as also given and it was stated that the tread of the same runs through wrap and weft of the fabric of the Constitutional Order made up by Article 14 and 21 of the Constitution of India. It was stated that justification of invoking of the said Rule can be made only by recording reasons in writing. Reference was drawn to the decision of Bombay High Court in Dee Vee Projects Ltd. V/s Union of India & Ors. Therefore, it was directed to revenue authorities to satisfy the pre-requisites of invoking Rule 86A failing which will render the same as unsustainable in the eyes of law and arbitrary exercise of powers.

Moreover, it was held that there is no system-based matching of ITC being carried out presently and the recipient are eligible to claim ITC provisionally on the basis of invoice issued. Reference was placed on the decision Delhi High Court in the case of Quest Merchandising India Pvt. Ltd. v/s Govt. of NCT of Delhi, W.P. (C) 6093 of 2017 dated 26.10.2017 wherein it was held that it is impossible task to ascertain that the seller have made payment of tax to the Government and therefore, assessee cannot be held liable for the same if due diligence is exercised appropriately. The revenue authorities initiate proceedings against the seller and not the purchaser. Reliance was placed on the decision of Madras High Court in Sri Vinayaga Agencies v. Assistant Commissioner, W.P. Nos. 2036 to 2038 of 2013, dated 29.01.2013 and Punjab and Haryana High Court in Gheru Lal Bal Chand v. State of Haryana, Civil Writ Petition No.6573 of 2007. The impugned order was quashed accordingly.

The above favouring decision is another development with respect to arbitrary blocking of credit without recording justifiable reasons. The Court properly emphasized the possible misuse of powers by revenue to harass the taxpayers. There had been catena of Judicial Pronouncements wherein the constitutional validity of the aforesaid Rule is challenged by the aggrieved taxpayers. Reference can be made to petition filed before Calcutta High Court in the case of M/s MRS REALTY PRIVATE LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. [WP No. 8142 of 2021]. On the other hand, the taxpayers have to exercise extra care and be cautious about selection of supplier. It is hoped that the Government comes with a provision so that innocent and honest taxpayers would not suffer at the cost of defaulting and dishonest taxpayers otherwise the idea of ease of doing business in GST Law would not sustain.

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GST Update No 224 on blocking of credit without recording reasons

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