2025 (3) TMI 1299 - HC - GST

Blocking the petitioner s Electronic Credit Ledger (ECL) under Rule 86A of the CGST/SGST Rules without a pre-decisional hearing and without independent reasons to believe - Principles of natural justice - HELD THAT - In the instant case since no pre-decisional hearing are provided/granted by the respondents before passing the impugned order coupled with the fact that the impugned order invoking Section 86A blocking of the Electronic credit ledger of the petition does not contain independent or cogent reasons to believe/accept by placing reliance upon reports of enforcement authority which is impermissible in law since the same is on borrowed satisfaction as held by Division Bench the impugned order deserves to be quashed. It is also pertinent to note that the impugned order except stating that the registered person/ supplier found to be a bill trader and involved in issuance/availment in fake invoices no other reasons are forthcoming in the impugned order. The impugned order is quashed - petition allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

1. Whether the impugned order blocking the petitioner's Electronic Credit Ledger (ECL) under Rule 86A of the CGST/SGST Rules was justified without a pre-decisional hearing and without independent reasons to believe.

2. Whether Rule 86A of the CGST/SGST Rules is arbitrary, unreasonable, and violative of Articles 14 and 19(1)(g) of the Constitution of India.

3. Whether the impugned order was based on borrowed satisfaction from another officer's findings rather than an independent inquiry.

ISSUE-WISE DETAILED ANALYSIS

1. Justification of Blocking ECL under Rule 86A without Pre-decisional Hearing

Relevant Legal Framework and Precedents:

Rule 86A of the CGST/SGST Rules allows blocking of the ECL if there are "reasons to believe" that the Input Tax Credit (ITC) was fraudulently availed or is ineligible. The Division Bench in K-9-Enterprises emphasized that pre-decisional hearings are necessary before such actions are taken.

Court's Interpretation and Reasoning:

The Court found that the impugned order was issued without providing the petitioner a pre-decisional hearing, violating the principles of natural justice. The Court reiterated the necessity of independent reasons to believe, which must be based on objective material rather than borrowed satisfaction.

Key Evidence and Findings:

The impugned order lacked independent reasons and was primarily based on reports from enforcement authorities. The Court highlighted that the order merely stated that the registered person was involved in issuing fake invoices without further substantiation.

Application of Law to Facts:

The Court applied the legal principles from the K-9-Enterprises case, emphasizing the requirement for independent inquiry and satisfaction before blocking the ECL. The Court noted that the respondents failed to provide a pre-decisional hearing and relied on external reports without independent verification.

Treatment of Competing Arguments:

The respondents argued that the impugned order was justified; however, the Court found these arguments unconvincing due to the lack of independent reasons to believe and absence of a pre-decisional hearing.

Conclusions:

The Court concluded that the impugned order was unjustified, lacking the necessary procedural safeguards and independent reasons to believe, thereby warranting its quashing.

2. Constitutionality of Rule 86A of the CGST/SGST Rules

Relevant Legal Framework and Precedents:

Article 14 of the Constitution guarantees equality before the law, while Article 19(1)(g) ensures the right to practice any profession or carry on any occupation, trade, or business. Rule 86A was challenged as being arbitrary and violative of these constitutional provisions.

Court's Interpretation and Reasoning:

The Court acknowledged the petitioner's challenge to Rule 86A but focused on procedural lapses in the specific case rather than a broad constitutional challenge. The Court emphasized the need for procedural fairness and independent assessment under Rule 86A.

Key Evidence and Findings:

The Court did not delve deeply into the constitutional validity of Rule 86A but highlighted procedural deficiencies in its application in the present case.

Application of Law to Facts:

The Court applied principles of procedural fairness, emphasizing that Rule 86A must be applied with due regard to the rights guaranteed under Articles 14 and 19(1)(g).

Treatment of Competing Arguments:

The respondents did not sufficiently address the constitutional challenge, focusing instead on procedural justifications for the impugned order.

Conclusions:

The Court did not make a definitive ruling on the constitutionality of Rule 86A but underscored the need for its application in a manner consistent with constitutional protections.

3. Reliance on Borrowed Satisfaction

Relevant Legal Framework and Precedents:

The concept of "reasons to believe" requires an independent assessment by the authority invoking Rule 86A. Reliance on external reports without independent inquiry is insufficient.

Court's Interpretation and Reasoning:

The Court found that the impugned order was based on borrowed satisfaction from another officer's findings, which is impermissible. The Court emphasized that the authority must independently verify facts before exercising powers under Rule 86A.

Key Evidence and Findings:

The impugned order was primarily based on findings from a field visit report without independent verification by the respondents.

Application of Law to Facts:

The Court applied the principle that "reasons to believe" must be based on independent inquiry and objective material, not merely on external reports or borrowed satisfaction.

Treatment of Competing Arguments:

The respondents failed to justify their reliance on external reports without independent verification, leading the Court to reject their arguments.

Conclusions:

The Court concluded that the impugned order was invalid due to reliance on borrowed satisfaction, lacking independent inquiry and reasons to believe.

SIGNIFICANT HOLDINGS

The Court held that the impugned order blocking the petitioner's ECL was unjustified due to procedural deficiencies, including the lack of a pre-decisional hearing and reliance on borrowed satisfaction. The Court emphasized the necessity of independent inquiry and objective reasons to believe before invoking Rule 86A.

Core Principles Established:

The Court reiterated that procedural fairness, including pre-decisional hearings and independent inquiry, is essential when exercising powers under Rule 86A. The Court underscored the need for objective reasons to believe, based on independent assessment rather than borrowed satisfaction.

Final Determinations on Each Issue:

The Court quashed the impugned order, directing the respondents to unblock the petitioner's ECL and allowing them to proceed against the petitioner in accordance with law, subject to the principles outlined in the judgment.