TMI Blog2023 (3) TMI 489X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned instructions, which are contrary to law. 3. It is also the petitioner s case that the blocking of the ITC was done without any tangible material or justifiable reasons, and merely on the instruction of another authority, which is impermissible. Factual Context 4. Briefly stated, the relevant facts necessary to address the controversy in the present petition are as under: 4.1 The petitioner received a summons under Section 70 of the Central Goods Services Tax Act, 2017, requiring the petitioner to appear before the Principal Commissioner of Central Taxes in connection with a case relating to issuance of fake GST invoices by one, Sh. Aman Handa others, without actual supply of goods under the CGST Act. The summons indicated that the said case was being inquired into by the Commissioner of Central Taxes, Delhi and that the petitioner was called upon to provide details of the transactions between the petitioner and twenty-three companies as set out in the schedule to the said summons. The petitioner claims that its representative appeared before the concerned officials on the date specified and explained that it had no transactions relating to the purchase of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities had wrongfully blocked the ITC without providing any reasons for the same. The petitioner claims that since no effective response was received and the ITC continued to remain blocked, it was constrained to deposit ₹36,49,074/-in cash against its liability for the month of December, 2020. It filed the return in form GSTR-3B without availing the ITC. 4.7 On 28.02.2022, respondent no.4 (Sales Tax Officer Class II, AVATO, Ward 76, Zone 7, Delhi) issued the impugned show cause notice calling upon the petitioner to furnish a response along with supporting documents in support of its claim. Although the notice also stated that the petitioner could appear before the concerned officer, however, the column against the entry date of personal hearing and time of personal hearing, was entered as NA . 4.8 The petitioner was also issued a summary show cause notice dated 28.02.2022, indicating the facts of the case as Input Tax Credit wrongly availed or utilised from the non-existent firm. The ground for issuing the summary show cause notice referred to a letter dated 28.09.2020 received from the Office of the Commissioner of Central Tax, GST. A table was set out refl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les, in exercise of which, the petitioner s ITC available in the ECL was blocked. Rule 86A of the Rules reads as under:- RULE 86A. Conditions of use of amount available in electronic credit ledger .- (1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as (a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36- (i) issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or (ii) without receipt of goods or services or both; or (b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or (c) the registered person availing the credit of input tax has been found non-existent or not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income Tax, Calcutta: (1972) 3 SCC 234, the Supreme Court had interpreted the expression reason to believe in the context of Section 34(1A) of the Income Tax Act, 1922 and had observed as under: 10. ..There can be no manner of doubt that the words reason to believe suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income Tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour .. 12. In The Income Tax Officer, I Ward, District VI, Calcutta Ors. v. Lakhmani Mewal Das: (1976) 3 SCC 757, the Supreme Court emphasised that the expression reason to believe could not be construed as reason to suspect and held as under: 12. The powers of the Income Tax Officer to reopen assessment though wide are not plenary. The words of the statute are reason to believe and not reason to suspect The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le conclusive evidence or finding is not required. But the prima facie formation of belief should be rational, coherent and not ex facie incorrect and contrary to what is on record. 15. Although the aforesaid decisions were rendered in the context of Section 147 of the Income Tax Act, 1961, the interpretation of the expression reason to believe is also relevant for understanding the meaning of the said expression as used in Rule 86A of the Rules. This is because income tax assessments, once concluded, are final. Re-opening of the assessments subjects the assessee to the rigors of the assessment procedure and, therefore, upsets the finality of the concluded assessment. Thus, initiation of such proceedings, which have adverse consequences, can be resorted to only if the specific conditions, as enacted, are satisfied. As stated above, Rule 86A of the Rules also provides for a drastic measure of blocking ITC. The same can be resorted to only if the conditions specified therein are fully satisfied. The existence of a reason to believe that the ITC has been availed fraudulently or the conditions of ineligibility, as specified in clauses (a) to (d) of Rule 86A of the Rules, are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also asserted that the Delhi State GST Department which has blocked the petitioner s ITC has no authority to be involved in the investigation against the petitioner. 19. It is clear that the petitioner s ITC was blocked on an allegation that the ITC availed was on account of fake invoices. However, the respondent, who had blocked the petitioner s ITC, had no information as to the fake transactions and had proceeded solely on the basis of a directive issued by the Joint Commissioner, GST West Commissionerate, Central Tax. It is, thus, clear that respondent no.4 had no tangible material to form any belief that the ITC lying in the petitioner s ECL was on account of any fake invoice; it had proceeded to take action solely on the basis of a direction issued by another authority. 20. Before the drastic measure to block a taxpayer s ECL is taken, it was necessary for the concerned officer to have some material to form a belief that the conditions under Rule 86A of the Rules are satisfied. 21. The petitioner had repeatedly approached the respondents for seeking reasons for blocking of its ITC and had also enquired about the steps that it was required to take for unblocking th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner as the SGST is not involved with the investigation. 12. That thereafter, the Delhi Govt. Dept. of Trade Taxes issued a circular on25.02.2022 where it was notified that in all cases where the ITC has been kept pending blocked for more than 1 year, all ward in-charges and Zonal In-Charges are requested to take necessary action. The copy of circular dated25.02.2022 is annexed herewith as ANNEXURE C-2. 26. It is also relevant to refer to Section 74(1) of the CGST Act, which reads as under: 74. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts. (1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f facts to evade tax, but solely to deprive the petitioner from utilising the ITC, which could no longer be kept blocked by virtue of Rule 86A(3) of the Rules. 33. The petitioner has also assailed the impugned instructions. The impugned instructions indicate that the ITC amounting to ₹2037.31 crores in respect of 6414 registered taxpayers was blocked by Delhi State GST Officers, and is lying blocked for a period exceeding one year. The said Circular also records that GSTN is contemplating introducing a functionality for automatically unblocking such ITCs in view of Rule 86(3) of the Rules. In the aforesaid context, the Department of Trade and Tax had emphasized the need for the proper officers to take immediate steps to finalise investigations and proceedings, in all these cases. And, subsequent to the same, either utilise the blocked credit against the demands issued or unblock the ITC if, during investigation/proceedings, it is found that the conditions for blocking the ITC no longer exist. 34. The impugned instructions also set out the indicative steps that may be taken by the proper officer on an urgent basis. In case of a taxpayer whose registration is active, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show cause notice can be issued only if the proper officer believes that ITC has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax . No show cause notice can be issued without the proper officer forming at least a prima facie view that the tax has not been paid or short paid or erroneously refunded or the ITC had been wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts. 36. Concededly, in the present case, respondent no.4 had no particulars as to the transaction in respect of which the ITC was blocked. He had no material whatsoever to come to the conclusion that the petitioner had wrongly availed or utilized the ITC by reason of fraud, wilful-misstatement or suppression of facts to evade tax. The respondents had blocked the petitioner s ITC solely on the directions issued by the Joint Commissioner, GST West Commissionerate, Central Tax. 37. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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