2025 (7) TMI 1623 - HC - GST

Blocking of input tax credit under Rule 86A of the Central Goods and Services Tax Rules 2017 / the Odisha Goods and Services Tax Rules 2017 - non-existent suppliers - burden of proof - violation of principles of natural justice - HELD THAT - Rule 36 of the CGST Rules warrants documentary proof for claiming input tax credit which are necessarily for the fact-finding adjudicating authority to verify and assess its sanctity on production of such documents for examination. Therefore for the paucity of material on the record relating to writ petition to consider the genuineness of the invoices and waybills correctness of entries in the books of account along with other relevant and related evidences this Court desists from adjudicating the issue raised on factual merit by the petitioner which is strongly opposed by the learned Standing Counsel. Rule 86A mandates that the Commissioner or an officer authorised by him not below the rank of Assistant Commissioner must have reasons to believe For elaborate illuminating discussion about the expression reason to believe reference can be had to State of U.P. Vrs. Aryaverth Chawal Udyog 2014 (11) TMI 1095 - SUPREME COURT that credit of input tax available in the electronic credit ledger is either ineligible or has been fraudulently availed by the registered person before disallowing the debit of amount from electronic credit ledger of the said registered person under Rule 86A. The remedy of disallowing debit of amount from electronic credit ledger being by its very nature extraordinary has to be resorted to with utmost circumspection and with maximum care and caution. It contemplates an objective determination based on intelligent care and evaluation as distinguished from a purely subjective consideration of suspicion. The reasons are to be on the basis of material evidence available or gathered in relation to fraudulent availment of input tax credit or ineligible input tax credit availed as per the conditions/grounds under sub-rule (1) of Rule 86A. Finding the present case in similitude with that of the above case where decision has been rendered in the context of allegation against the availing input tax credit that fact-finding on the nature of dispute set up by the Department can be subject-matter for adjudication by the statutory authority empowered in this behalf and thereafter if need arises the same could be tested before the other statutory authorities in the hierarchy of adjucatory process. Having found that it is not a fit case for exercise of extraordinary jurisdiction under Articles 226 and 227 of the Constitution of India this Court refrains from entertaining the writ petition. Hence it would be mete and appropriate if the authority in seisin over the matter is directed to consider reply/explanation submitted by the petitioner vide Annexure-4 within a period of four weeks hence by affording opportunity of hearing to the petitioner - Petition disposed off by way of remand.

Summary

ISSUES:

Whether the unilateral blocking of Input Tax Credit (ITC) under Rule 86A of the CGST Rules, 2017 / OGST Rules, 2017 without compliance with principles of natural justice is lawful.Whether the suppliers alleged to be "non-existent" for the purpose of blocking ITC were in fact non-existent or compliant with statutory obligations.Whether the petitioner is entitled to avail ITC when the suppliers have filed returns and discharged tax liabilities fully for the relevant period.Whether the Court should interfere at the stage of investigation and enquiry regarding blocking of ITC or leave the matter to be adjudicated by the statutory authorities.The scope and conditions for exercise of power under Rule 86A of the CGST Rules, 2017 for blocking ITC.Whether the writ jurisdiction under Articles 226 and 227 of the Constitution of India is appropriate for adjudication of disputed factual issues relating to ITC blocking and assessment under the GST Act.

RULINGS / HOLDINGS:

The Court held that the power under Rule 86A to block ITC must be exercised only when the Commissioner or an authorized officer has "reasons to believe" that the credit has been fraudulently availed or is ineligible on specified grounds, and such reasons must be recorded in writing with proper application of mind.The Court found that the suppliers alleged as non-existent had filed statutory returns and discharged their liabilities fully for the period in question, indicating that they were not non-existent as alleged.The Court held that the explanation submitted by the petitioner against blocking of ITC had not been considered by the authority concerned, and therefore the matter requires adjudication by the statutory authority before any interference by the Court.The Court declined to interfere at the stage of investigation and enquiry, noting that the remedy of disallowing debit of electronic credit ledger is extraordinary and must be resorted to with "utmost circumspection and with maximum care and caution."The Court emphasized that the factual and documentary verification required for entitlement to ITC under Section 16(2) and Rule 36 of the CGST Rules is a matter for the adjudicating authority and not for the writ Court to decide on the limited record before it.The Court held that writ jurisdiction under Articles 226 and 227 is not ordinarily available to challenge blocking of ITC or show cause notices issued under the GST Act, except in exceptional circumstances such as breach of fundamental rights, violation of natural justice, excess of jurisdiction, or challenge to vires of the statute.The Court directed the authority to consider the petitioner's reply/explanation within a stipulated time and afford an opportunity of hearing, but refrained from expressing any opinion on the merits of the case.

RATIONALE:

The Court applied the legal framework under the Central Goods and Services Tax Act, 2017 and the Odisha Goods and Services Tax Act, 2017, particularly Section 16 (entitlement to input tax credit), Section 73 (recovery of tax), Rule 36 (documentary requirements for ITC), and Rule 86A (blocking of ITC).The Court relied on authoritative precedent emphasizing that "the burden is upon the purchasing dealer to prove the genuineness of the transaction" and that entitlement to ITC is subject to strict documentary and procedural compliance as prescribed by law.The Court referred to the Supreme Court's interpretation of Section 16 and Section 17(5) of the CGST Act, clarifying the conditions and restrictions on availing ITC and the overriding effect of certain provisions.The Court noted that the power to block ITC under Rule 86A is an extraordinary power that must be exercised on the basis of "reasons to believe" supported by material evidence, not merely on suspicion or unilateral action.The Court recognized the ongoing investigation and factual incongruity between the parties' contentions, concluding that the matter is fit for adjudication by the statutory authority empowered under the GST Act rather than by the writ Court at the admission stage.The Court highlighted the settled principle that writ jurisdiction is not a substitute for statutory remedies, especially when alternate appeal or adjudicatory mechanisms exist under the GST Act, such as appeals under Section 107.The Court cited relevant High Court and Supreme Court decisions underscoring that writ petitions challenging GST assessments or blocking of ITC will not be entertained unless exceptional circumstances are shown.