‘Sufficient Balance’ not required in Electronic Credit Ledger in order to block ITC due to ineligibility under Rule 86A

[CA Bimal Jain]

The Hon’ble Calcutta High Court in the case of BASANTA KUMAR SHAW, PROPREITOR OF M/S. N.M.D. ENGINEERING WORKS VERSUS THE ASSISTANT COMMISSIONER OF REVENUE, COMMERCIAL TAXES AND STATE TAX, TAMLUK CHARGE AND OTHERS - 2022 (8) TMI 50 - CALCUTTA HIGH COURT  held that in terms of Rule 86A(1) of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”), the Electronic Credit Ledger (“ECL”) doesn’t need to contain sufficient balance for the purpose of blocking the credit.

Facts:

The Appellant, Basanta Kumar Shaw, filed an intra Court appeal against the BASANTA KUMAR SHAW, PROPRIETOR OF N.M.D. ENGINEERING WORKS VERSUS ASSISTANT COMMISSIONER OF REVENUE, COMMERCIAL TAXES AND STATE TAX, TAMLUK CHARGE & ORS. - 2022 (8) TMI 54 - CALCUTTA HIGH COURT. The said writ petition was filed challenging Order No. 102 dated May 23, 2022 passed by the Respondent, under Clause (a)(ii) of Sub-Rule (1)  Rule 86A of the CGST Rules and the West Bengal Goods and Services Tax Rules, 2017, (“the WBGST Rules”), disallowing debit of Integrated Goods and Services and Tax (“IGST”) from the ECL for discharge of any liability under Section 49 of the WBGST / the CGST Act or the claim of any refund of any unutilized input.

The Appellant was issued three Show Cause Notices (“the SCNs”), served upon him on January 20, 2022 and January 28, 2022 for mismatch between Form GSTRA-2A (auto-populated) and GSTR-3B for the tax period from April 2018 to March 2019, from March 2019 to March 2020 and April 2020 to March 2021. The Appellant was asked to furnish an explanation or file the amount of tax as assessed in the SCNs along with interest.  Though the Appellant deposited an amount of Rs. 10 lakhs but did not submit its reply to the SCNs within the stipulated time.  Pursuant to which, the Respondent vide Order dated May 23, 2022 disallowed the debit of IGST amounting to Rs. 2,67,96,042/- in terms of Rule 86A (a) (iii) of the WBGST Rules from the ECL for discharge of liability under Section 49 of the WBGST / the CGST Act.

Thereafter, the Appellant filed representation letters to the Respondent seeking extension of time to file reply to the SCNs and before filing its reply, filed writ petition before the High Court. The writ petition was disposed of by Order dated June 20, 2022, directing the Respondent to consider the reply to the SCN filed by the Appellant.

Henceforth, the Appellant filed the inter Court appeal before the High Court submitting that the Order dated June 20, 2022 need to be quashed as the Respondent had already initiated proceedings under Section 73 of the CGST / the WBGST Act. The Appellant contended that the blocking of input tax credit (“ITC”) in ECL is invalid and it would amount to recovery of demand without adjudication. The Appellant further submitted that Rule 86A of the CGST Rules provides for blocking of credit in ECL and on date when the order was passed there was no credit available in the Appellant’s electronic ledger. Therefore, the blocking of ITC by the respondent would be ‘negative blocking’ which is not provided under Rule 86A of the CGST Rules.  The Revenue argued in defence of the action by stating that the word “available” in Rule 86A (1) must be interpreted to mean the ITC that was available in ECL at the relevant time has been illegally claimed or is ineligible, the High Court clarified that the right to claim ITC is not a vested right and that the same is regulated by law. The Court also clarified the scope, ambit and effect of Rule 86A of the CGST Rules.

Issue:

Whether ‘Sufficient Balance’ is required in ECL in order to block ITC due to ineligibility under Rule 86A of the CGST Rule.

Held:

The Calcutta High Court in its decision stated that the word “available” has to be read along with the remaining words which is “in the ECL has been fraudulently availed or is ineligible”, “has been fraudulently availed”. Additionally, the keywords in Rule 86A are “available in” and “has been”. The High Court also stated that when the words "available" and "has been" are juxtaposed, it is evident that whatever was listed as "available" in the ECL at the time has either been fraudulently accessed or is ineligible. The High Court further  clarified that Rule 86A of the CGST Rules has not been framed to recover the credit fraudulently availed, but to incentivize tax compliance by tax payers.

The High Court  did not convinced with the interpretation provided in SAMAY ALLOYS INDIA PVT. LTD. VERSUS STATE OF GUJARAT - 2022 (2) TMI 843 - GUJARAT HIGH COURT and therefore relied  on M/S. RM DAIRY PRODUCTS LLP VERSUS STATE OF UP AND 3 ORS. - 2021 (7) TMI 1057 - ALLAHABAD HIGH COURT The word "available" in Rule 86(1) must be read in conjunction with the remaining phrases i.e. "in the ECL has been fraudulently availed or is ineligible" and observed that "Has been fraudulently availed" obviously refers to an instance that has already happened. Examining the accusations in the SCN makes the same apparent.

The High Court added that the statute does not use the phrase "negative balance," so this theory cannot be imported to support the claim that there should be a positive balance to invoke Rule 86A of the CGST Rules, rather the expressions such as "negative blocking" are used in common parlance among dealers."

Therefore, the Calcutta High Court upheld the decision of the Single Bench of the High Court and dismissed the appeal.

Relevant Provisions:

Rule 86A (1) of the CGST Rules

Conditions of use of amount available in electronic credit ledger: -

(1) The Commissioner or an officer authorized by him in this behalf, not below the rank of an Assistant Commissioner, having reason to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-

(a) The credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule-36

(i) Issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

(ii) Without receipt of goods or services or both; or

(b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

(c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

(d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36.

May, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under Section 49 or for claim of any refund of any unutilized amount.

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