2023 (3) TMI 489 - HC - GST

Blocking of ITC and the subsequent appropriation of the said amount to satisfy the demand as raised by the impugned order - Proper/competent Officer to block the credit - HELD THAT - The ITC can be blocked by a Commissioner or an officer authorised by him in his behalf not below the rank of an Assistant Commissioner provided that he has reasons to believe that the ITC available in the ECL has been fraudulently availed or is ineligible on account of the reasons as set out in Clauses (a) to (d) of Sub-rule (1) of Rule 86A of the Rules - In SUNNY JAIN VERSUS THE UNION OF INDIA ANR ORS. 2022 (12) TMI 653 - DELHI HIGH COURT this Court had examined the language of Rule 86A(1) of the Rules and had held that the reasons set out in Clauses (a) to (d) of Rule 86A(1) of the Rules exhaustively set out the conditions of ineligibility. Thus unless the competent officer has reasons to believe that the conditions in the said clauses are satisfied or the ITC was fraudulently availed the ITC in the ECL cannot be blocked. Blocking of the ITC effectively deprives the taxpayer of a valuable resource to discharge its liability and realise the value in monetary terms. Thus undisputedly the said action is a drastic step and it is necessary that all legislative checks and balances enacted in respect of exercise of power to take such measures are duly satisfied. In the present case the respondents had no material to form any opinion that the ITC had been availed wrongly on account of any fraud or any wilful-misstatement or suppression of facts to evade tax. Concededly the respondents had no material to form any independent opinion whatsoever. It is apparent that the impugned show cause notice was issued in a mechanical manner to comply with the impugned instructions. There are no hesitation in holding that the impugned show cause notice is not in conformity with the provisions of Section 74 of the CGST Act and is thus without authority of law - It is also clear from a plain reading of the impugned instructions that it suggests that the exercise of issuing a show cause notice and creating a demand should be completed before unblocking the ITC notwithstanding that the period of one year has elapsed after the blocking of the ITC. This is contrary to the express provisions of Rule 86A(3) of the Rules. It is apparent that the impugned instructions to the aforesaid extent has been issued only to overcome the provisions of Rule 86A(3) of the Rules and the impugned instructions to this extent cannot be sustained. The impugned show cause notice and the impugned order are set aside - petition allowed.

Summary

Issues Involved:
1. Legality of the blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods & Services Tax Rules, 2017.
2. Validity of the show cause notice and the subsequent order under Section 74 of the Central Goods and Services Tax Act, 2017.
3. Legality of the instructions issued by the Department of Trade & Taxes (Policy Branch), Government of NCT of New Delhi.

Issue-wise Detailed Analysis:

1. Legality of the blocking of Input Tax Credit (ITC) under Rule 86A of the Central Goods & Services Tax Rules, 2017:
The petitioner argued that the blocking of ITC was done without any tangible material or justifiable reasons, merely on the instruction of another authority, which is impermissible. The court referred to Rule 86A, which allows blocking of ITC if the Commissioner or an authorized officer has "reasons to believe" that the credit was fraudulently availed or is ineligible. The court emphasized that such action is a drastic step and must be based on clear legislative checks and balances. The court cited various judgments, including *Sunny Jain v. Union of India & Ors.*, to highlight that the reasons for blocking ITC must be recorded in writing and based on tangible material, not mere suspicion. The court found that the respondents had no tangible material to form a belief that the ITC was availed fraudulently and had acted solely on the directive of another authority.

2. Validity of the show cause notice and the subsequent order under Section 74 of the Central Goods and Services Tax Act, 2017:
The petitioner challenged the show cause notice and the subsequent order for being mechanical and without any particulars. The court noted that a show cause notice under Section 74 can only be issued where it appears to the proper officer that the tax has not been paid, short paid, or the ITC has been wrongly availed or utilized by reason of fraud, wilful-misstatement, or suppression of facts. The court found that the respondents had no material to form any opinion that the ITC was availed wrongly due to fraud or misstatement. The show cause notice was issued in a mechanical manner, merely to comply with the impugned instructions, and thus, was not in conformity with Section 74 of the CGST Act and without authority of law.

3. Legality of the instructions issued by the Department of Trade & Taxes (Policy Branch), Government of NCT of New Delhi:
The petitioner also assailed the instructions, which suggested creating a demand by disallowing ITC and appropriating the blocked ITC against the demand. The court noted that the instructions cannot override the provisions of the Act and Rules. The instructions suggested issuing a show cause notice and creating a demand before unblocking ITC, even if the period of one year had elapsed, which is contrary to Rule 86A(3). The court held that the impugned instructions, to the extent they suggest continuing to block ITC beyond one year, are unsustainable and set them aside.

Conclusion:
The court allowed the petition, setting aside the impugned show cause notice and order, and directed the respondents to restore the appropriated ITC to the petitioner's Electronic Credit Ledger. The court clarified that the respondents are not precluded from ascertaining the petitioner's liability under the DGST Act or the CGST Act in accordance with the law.