GST Update No 326 on blocking of electronic credit ledger in case of negative balance

The issue as regards blocking of credit by department has been a matter of grave concern since the introduction of said Rule. The assessee faces liquidity crunch as the tax liability is to be discharged in cash due to blocking of their electronic credit ledger by the amount of wrongly availed credit which ultimately disrupts the business operations. Moreover, it is often observed that the revenue authorities also misuse these powers in various cases and invoke the rule on arbitrary basis. On similar lines, one case was reported before Calcutta High Court in the case of M/S BASANTA KUMAR SHAW V/S ASSISTANT COMMISSIONER OF REVENUE. The decision imparted in this case is subject matter of discussion of our today’s update. The petitioner was issued three show cause notices which were served on 20.01.2022 and 28.01.2022 wherein it was alleged that the as per the records, there is a mismatch between the appellant’s input tax credit in GSTR-2A from the details of outward supplies furnished by the appellant’s supplier in their respective GSTR-1 and GSTR-3B. It was advised to the appellant to furnish proper explanation in this respect by 04.02.2022 or pay the amount demanded along with interest. On 30.03.2022, the appellant made payment of Rs. 10 Lakhs. However, the reply of show cause notice was not submitted within the prescribed time period. Therefore, an order was passed dated 23.05.2022, disallowing the input tax credit amounting to Rs. 2,67,96,042/- from the electronic credit ledger. Thereafter on 31.05.2022, the appellant submitted three representations requesting extension of time to submit a detailed reply which was received as on 09.06.2022. The appellant approached the Court even before filing of reply of show cause notice on 13.06.2022. The writ petition has been disposed of stating to consider the reply filed by the petitioner to the show-cause notices. The counsel of petitioner submitted that the order should be quashed since proceedings are initiated under Section 73 of CGST Act, 2017. Furthermore, it was argued that Rule 86A provides for blocking of credit in the electronic credit ledger only to the extent the credit is available in the electronic credit ledger. On the date of passing the order, there was no credit available in the balance of electronic credit ledger. Therefore, it is a negative blocking. Further, the blocking of the electronic credit ledger cannot be sustained since credit of the input tax available in the electronic credit ledger has been fraudulently availed. The negative blocking would result into permanent recovery even before the conclusion of the adjudication as the appellant would have to additionally make the payment to the extent of the blocked input tax credit. Also, the appellant is unable to run the business and file monthly returns. The appellant argued that input tax credit is a vested right. Reference in this respect was placed on decision of the High Court of Gujarat in Samay Alloys India Pvt. Ltd. Versus State of Gujarat. It was contended that the condition precedent is that the input tax credit should be available in the electronic credit ledger before invoking Rule 86A of CGST Rules, 2017. Since the primary condition as regards to availability of balance in credit ledger was not fulfilled, the said rule cannot be invoked. Further, Rule 86A is invoked at a stage which is prior to the finalization of the assessment or raising a demand. Reference was drawn to New Nalbandh Traders Versus State of Gujarat and Ors. and Milap Scrap Traders Versus State/Commercial Tax Officer. The Counsel of respondent argued that the reply of SCN was submitted after filing of the Writ Petition. Moreover, the proceedings have already been initiated under Section 73/74 of the Act which should be contested by the appellant. Rule 86A allows blocking of the electronic credit ledger if the authority concerned has reasons to believe that the credit of input tax has been fraudulently availed or is ineligible. Further, the word “available” in Rule 86A has to be read to mean that the credit of input tax which was available at the relevant time which in the opinion of the authority has been fraudulently availed or the appellant is ineligible to avail such credit. Therefore, merely because there was negative balance in the credit ledger, the Rule cannot be said to be inoperative. Therefore, Rule 86A has to be read in its entirety and the interpretation given by the appellant is misreading the Rule and rather making the Rule unworkable which is impermissible under law. Reference was drawn to decision of the High Court of Allahabad in case of R M Dairy Products LLP Versus State of U.P. and 3 Ors.; Writ Tax No. 434 of 2021. It was argued that the rule creates a lien without actual recovery being made or attempted. The word “available” used in the said rule relates back in time when the assessee allegedly availed input tax credit either fraudulently or which he was not eligible to avail and it does not relate to the input tax credit available on the date when Rule 86A is invoked.The Court interpreted the Rule 86A and stated that in Memorandum of Appeal, the appellant has contended that the right to claim tax credit is a vested right and the authority is not entitled to restrict the appellant from exercising such vested right. This contention is incorrect. Reliance in this respect is placed on decision of Apex Court in the case of Jayam & Co. Versus Assistant Commissioner (Ct) and Another, ALD Automotive Pvt. Ltd. Versus Commercial Tax Officer & Others and Madras High Court in the case of P.R. Many Electronics Versus Union of India WP No. 8890 of 2020. It was held that the right conferred on the appellant is regulated by the provisions of the Act and it is a concession granted under the statute. Observing the Rule 86A of CGST Rules, 2017, the key word which falls for interpretation is the word “available”. It was stated that the said Rule is to be read entirely to arrive at correct interpretation. The cardinal principle of statutory interpretation is to read a provision so as to give its full meaning and purport and the presumption is no words used in the statute are useless and an interpretation which will make the statutory provision redundant has been frowned upon. The word “available” cannot be read in isolation and the expression “has been fraudulently availed” would undoubtedly denote a situation which has occurred in the past. This demonstrates that the submission that Rule 86A can be invoked only if there is a balance make the rule redundant and defeating the very purpose of enacting such a rule. It cannot be disputed that Rule 86A has not been framed to recover the credit fraudulently availed. The purpose is to act as a deterrent pending adjudication of the alleged fraudulent availment or ineligible availment. Reference was drawn to decision of Apex Court in the case of Commissioner of Income Tax, Madras Versus Kasturi and Sons Limited wherein reference was drawn to principles of statutory interpretation stating that in a taxing Act one has to look merely at what is clearly said and there is no room for any intendment. Reference was also drawn to the Clause 12 of Circular dated 24.05.2021 wherein there is no indication that the electronic credit ledger cannot be blocked if there is NIL balance or insufficient balance. Further, circular does not in any manner give the interpretation that Rule 86 A (1) can be invoked only if there is a positive balance in credit ledger. The duty of the Court is to assess the true intentions of legislature and to deliver the decision in public interest. Reference was drawn to Utkal Contractors & Joinery (P) Ltd. Versus State of Orissa, State of West Bengal Versus UOI, Sevantilal Versus CIT, State of T.N. Versus M.K. Kandaswami. Further, the definitions as prescribed in Oxford Dictionary were also referred to. The word “available” is to be read in conjunction with the words “has been”, if done so, it clearly manifests that what was “available” in the electronic credit ledger at the relevant time has been fraudulently availed or is ineligible. Further, there is no such expression as “negative blocking” used in rule 86A. If the statute does not use the expression negative balance, such theory cannot be imported to justify the contention of appellant. Such interpretation would render the rule redundant and it can be also rewarding the assessee at times. Further, if the assessee fails to file monthly return, the registration would be liable to be cancelled as well. The appellant has not been prevented from carrying on his business activities, all that has been done is to prevent him from operating the electronic credit ledger. Therefore, the decision passed by Single Bench is dismissed. The reply of appellant is to be considered after providing an opportunity of hearing to them and the case is to be decided.

The above decision is a setback for trade and industry wherein the Courts held that Rule 86A can be invoked even if there is negative balance in the credit ledger. This has increased the miseries of business houses manifolds since now the powers of revenue authorities have increased and widened. The need of the hour is that the Government should come up with an idea of issuing proper guidelines for invoking this rule failing which the assessee will continue to suffer the wrath and agony of the departmental officers.

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GST Update No 326 on blocking of electronic credit ledger in case of negative balance

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