Blocking of electronic credit ledger of recipient dealer on account of fault of supplier dealer lacks any statutory authority. Post decisional hearing required to be provided to aggrieved taxpayer within 2 weeks from date of order blocking the ECL.

[Gaurav Gupta]

Hon'ble Gujarat High Court has recently delivered a landmark ruling in the matter of M/S NEW NALBANDH TRADERS VERSUS STATE OF GUJARAT & 2 OTHER (S) [2022 (3) TMI 908 - GUJARAT HIGH COURT] on the issue of arbitrary blocking of electronic credit ledger of the tax payer (Petitioner in this case).

The gist of the ruling is as under:

Facts

Petitioner purchased goods on the strength of tax invoice, weighment slips, e-way bills etc. from M/s Anmol Traders.

Petitioner's electronic credit ledger was blocked under Rule 86A to the tune of ₹ 97.17 lakhs on the purchases made from M/s Anmol Traders. The said blocking of ECL was done without communicating any reasons to Petitioner.

Hon’ble Court’s observations

On the grievance of the Petitioner, the High Court examined the legal niceties of Rule 86A of the CGST Rules, and reiterated the legal position that any administrative power having quasi-judicial shades, which brings civil consequences for a person against whom it is exercised, must answer the test of reasonableness. Meaning thereby that it would mean that the power must be exercised fairly and reasonably by following the principles of natural justice.

Post-decisional or remedial hearing opportunity

It must be noted that Rule 86A authorizes a proper officer to block the electronic credit ledger of a tax payer in case any of the jurisdictional pre-conditions are satisfied. The Court observed that it is of drastic nature and accordingly, it was held that post decisional or remedial hearing would have to be granted to the person affected by blocking of his ECL. Such hearing opportunity, it was held, may be granted within reasonable period of time which may not be beyond two weeks from the date of order blocking the ECL. After grant of such hearing, authority may proceed to confirm the order or revoke such order.

Recording of reasons to believe

Examining the above rule, the Hon'ble Court also directed that authorities have to record the reason to believe, which is pre-requisite before proceeding to block ECL.

No penalization of bona fide recipient dealer for default of selling dealer

Another interesting observation of the Hon'ble Court which may as well go on to make the GST regime more robust is to protect a bona fide recipient dealer from the default of selling dealer in depositing tax to the credit of Government. This particular issue has led to interesting evolution of tax jurisprudence. In the GST regime, it must be noted that condition governing eligibility of ITC provides that input tax credit may not be available to a dealer until and unless the selling dealer deposits the tax. How can a recipient make sure that supplier deposits tax? Why should the recipient be blamed for fault of supplier, when in fact, the goods/ services/ both have been procured on basis of legitimate documents. The aforesaid remarks came to be made by the Hon'ble Court on the strength of Section 43A of the CGST Act (which is not notified yet and which has been proposed to be omitted vide Finance Bill, 2022). Section 43A as it stood, provides that supplier and recipient of a supplly shall be jointly and severally liable to pay tax, or to pay the input tax credit availed, as the case may be, in relation to the outward supplies. The Hon'ble Court added a caveat that the said provision has not been notified yet, and accordingly, it was held that the blocking of a recipient's credit ledger on the account of default of supplier, vide Rule 86A, is wanting of statutory authority at present.

The Hon'ble Court further observed that there existed a mechanism to reverse credit in case of discrepancy in the ITC availed by the recipient, against the output liability of the supplier. However, there is no system based matching of the ITC being carried out presently, and till the time such provisions are given effect, the recipients shall be eligible to claim ITC provisionally on the basis of invoice issued by Customer. 

Ruling

The Hon’ble High Court observed that the impugned order blocking the ECL of Petitioner is bereft of any reasons. It was observed that when the first requirement of Rule 86A is, of having reasons to believe, and when in fact it has manifestly not been followed, the impugned order was held to be erroneous in law.

The Hon'ble High Court held that blocking of a recipient's credit ledger on the account of default of a supplier, vide Rule 86A, is wanting of statutory authority at present. In this regard, the Hon'ble Court relied on the famous decisions of Delhi High Court in Arise India (affirmed by Supreme Court). The Hon'ble Court also observed that recipient may provisionally claim credit on the basis of invoice issued by customer (sic vendor).

In view of the above, the Hon'ble Court laid down the law as above, and quashed the impugned order passed by Respondents blocking the electronic credit ledger of Petitioner.

By Gaurav Gupta

Mobile: 7379139145

E-mail: gaurav.advocate@RAAprofessionals.com