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2025 (5) TMI 1430 - HC - GSTElectronic credit ledger blocked by invoking Rule 86A of the the CGST Rules - No pre-decisional hearing provided/granted and No valid reasons to believe contain in passing the impugned order - Rule of Audi alteram partem - Challenged the validity of the impugned orders - HELD THAT - In view of the dictum of the Division Bench in the case of K-9-Enterprises Vs. State of Karnataka 2024 (10) TMI 491 - KARNATAKA HIGH COURT I am of the considered opinion 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 and the business premises is not existing no other reasons are forthcoming in the impugned order. On this ground also the impugned order dated 13.01.2025 deserves to the quashed. In the result pass the following The petition is hereby allowed and Impugned order dated 13.01.2025 at Annexure - A is hereby quashed. The concerned respondents are directed to unblock the Electronic credit ledger of the petitioner immediately upon the receipt of copy of this order so as to enable the petitioner to file returns forthwith. Liberty is reserved in favour of the respondents to proceed against the petitioner in accordance with law and in terms of the judgment of Division Bench in K-9-Enterprises Vs. State of Karnataka reported in W.A.No.100425/2023 and connected matters. The petitioner is directed to appear before respondent No.2 on 21.04.2025 without awaiting further notice from respondent No.2. It is further made clear that in the event petitioner does not appear before respondent No.2 on 01.04.2025 the present order shall stand automatically recalled/cancelled and the present petition shall stand revived/ restored without further orders and without reference to the Bench.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court were: (a) Whether the respondents were justified in blocking the Electronic Credit Ledger (ECL) of the petitioner under Rule 86A of the Central Goods and Services Tax Rules, 2017 (CGST Rules) without providing a pre-decisional hearing to the petitioner; (b) Whether the impugned orders blocking the ECL were passed based on valid "reasons to believe" as required under Rule 86A, supported by independent and cogent material, or whether the orders were founded on borrowed satisfaction without proper application of mind; (c) Whether principles of natural justice, including the audi alteram partem rule, apply to the exercise of power under Rule 86A, despite the absence of an express statutory mandate; (d) Whether a post-decisional hearing suffices in circumstances where the order entails serious civil consequences such as blocking of input tax credit; (e) The validity and procedural propriety of the impugned orders in light of the above considerations. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a): Requirement of Pre-Decisional Hearing before Blocking ECL under Rule 86A The Court examined the statutory framework under Rule 86A of the CGST Rules, which empowers the Commissioner or an authorized officer to block the electronic credit ledger if there are "reasons to believe" that input tax credit (ITC) has been fraudulently availed or is ineligible. The rule itself does not expressly mandate compliance with principles of natural justice or provide for a pre-decisional hearing. However, the Court relied extensively on precedents, particularly the Division Bench judgment in K-9 Enterprises and authoritative Supreme Court rulings such as C.B. Gautam v. Union of India, Sahara India (Firm) v. CIT, and Mohinder Singh Gill v. Chief Election Commissioner. These cases establish that even in the absence of express statutory provisions, principles of natural justice-including the right to be heard before an adverse order-is to be read into administrative actions that entail serious civil consequences. The Court noted that blocking the ECL results in severe civil consequences, including denial of a valuable right to avail ITC, which affects the petitioner's financial position and business operations. The Court emphasized that a post-decisional hearing is ordinarily no substitute for a pre-decisional hearing, especially where the order is draconian and affects civil rights. The Court rejected the learned Single Judge's view that a post-decisional hearing sufficed, relying on precedents such as K.I. Shephard and H.L. Trehan, which underscore the futility of post-decisional hearings once the adverse order has been passed. Accordingly, the Court held that Rule 86A must be read as requiring adherence to natural justice principles, including the grant of a pre-decisional hearing, unless exceptional circumstances justify its omission. No such exceptional circumstances were found in the present case. Issue (b): Existence of "Reasons to Believe" and Independent Application of Mind The Court scrutinized the impugned orders to determine whether the respondents had valid "reasons to believe" as mandated by Rule 86A before blocking the ECL. The Court observed that the orders were based solely on communications from other officers-specifically, a field visit report by an Assistant State Tax Officer in Goa-without any independent inquiry or application of mind by the competent authority. The Court emphasized that the phrase "reasons to believe" requires formation of an independent opinion based on cogent and tangible material, not mere borrowed satisfaction or mechanical action. The Court referred to the CBEC Circular dated 02.11.2021, which prescribes that the Commissioner or authorized officer must apply their mind carefully, considering all facts, the nature of the alleged fraud, and the necessity of blocking the ECL to protect revenue interests. The impugned orders were found to be cryptic, vague, and non-speaking, lacking any recorded reasons or rationale. The Court held that the respondents failed to verify the genuineness of transactions or consider that a bona fide recipient cannot be penalized for a supplier's default. The Court further noted that closure of a supplier's business in 2020 or 2021 could not justify denial of credit availed in 2017 or 2018. Consequently, the Court concluded that the respondents did not fulfill the mandatory preconditions of Rule 86A, rendering the blocking orders illegal and arbitrary. Issue (c): Applicability of Principles of Natural Justice The Court extensively analyzed the scope and applicability of natural justice principles in administrative and quasi-judicial actions, citing landmark rulings such as Sahara India (Firm), Olga Tellis, and Canara Bank v. V.K. Awasthy. The Court reiterated that natural justice is a "pragmatic requirement of fair play in action" and applies unless expressly excluded by statute. The Court emphasized that administrative orders causing civil consequences-such as blocking ITC-must comply with audi alteram partem. The Court rejected the argument that administrative convenience or expediency could justify denial of hearing, except in truly exceptional circumstances. The Court also highlighted that recording reasons in writing is not a substitute for affording a reasonable opportunity to be heard before passing an adverse order. Issue (d): Sufficiency of Post-Decisional Hearing The Court addressed the contention that a post-decisional hearing under Rule 86A or related provisions satisfies natural justice requirements. It relied on precedents holding that post-decisional hearings are inadequate substitutes for pre-decisional hearings when the order entails serious civil consequences. The Court noted that post-decisional hearings typically relate to review of evidence gathered after the order, not the validity of the order itself. The Court cited H.L. Trehan and K.I. Shephard to underscore that once a decision is taken, the authority is unlikely to reconsider it impartially, making post-decisional hearings ineffective in preventing arbitrariness. Therefore, the Court held that a post-decisional hearing does not cure the failure to provide a pre-decisional hearing in cases involving blocking of ECL. Issue (e): Validity of the Impugned Orders Applying the above principles to the facts, the Court found the impugned orders blocking the petitioner's ECL to be vitiated by procedural infirmities and lack of independent application of mind. The orders failed to disclose cogent reasons or material justifying the blocking, were based on borrowed satisfaction, and did not accord the petitioner a pre-decisional hearing. The Court further observed that blocking the ECL without valid reasons and without hearing the petitioner would cause irreparable injury and defeat the purpose of the value-added tax system by leading to cascading tax effects. In view of these findings, the Court quashed the impugned orders and directed the respondents to unblock the petitioner's ECL immediately to enable filing of returns. The Court also granted liberty to the respondents to issue fresh notices and proceed in accordance with law, ensuring compliance with principles of natural justice and proper application of mind. 3. SIGNIFICANT HOLDINGS The Court's crucial legal reasoning includes the following verbatim excerpts: "Though rule 86A does not expressly/specifically provide for adherence to principles of natural justice, the same would necessarily have to be read into rule 86A and complied with while invoking the said provision." "When the ECL of the appellants was sought to be blocked and such credit cannot be utilised for up to one year, the said blocking would entail and result in serious civil consequences for the appellants warranting compliance with the principles of natural justice and providing an opportunity of hearing to the appellants." "The power of disallowing debit of amount from electronic credit ledger must not be exercised in a mechanical manner and careful examination of all the facts of the case is important to determine case(s) fit for exercising power 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." "The impugned order discloses that the same has been passed based on the communication received from other officers, without any independent application of mind... This is not the manner in which the law expects the power under rule 86A to be exercised." "A post-decisional hearing is ordinarily no substitute for a pre-decisional hearing, especially when the order entails serious civil consequences." "The impugned orders blocking the Electronic Credit Ledgers of the Appellants by invoking Rule 86A... are bald, vague, cryptic, laconic, unreasoned and non-speaking and deserve to be set aside." Core principles established:
Final determinations:
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