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TMI Blog2023 (8) TMI 170X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners, they have been purchasing the goods from the customers/dealers registered under the Act of 2017 and have been complying with the necessary Rules and Regulations governing the business under the GST Regime. The petitioners claim that they have purchased goods from the persons who are registered under the Act of 2017 and there is no fraud played by the petitioners in the transaction and without even affording an opportunity of hearing, respondent no.2 has abruptly issued the impugned orders blocking the ITC available in their electronic credit ledger. Being aggrieved by the same, the petitioners are before this Court. 3. Learned Counsel for the petitioners submits that the impugned orders have been issued in violation of the principles of natural justice. He submits that the act of respondent no.2 is violative of the rights guaranteed to the petitioners under Articles 14 & 19(1)(g) of the Constitution of India. He submits that even if the persons from whom the petitioners have purchased the goods are assumed to be fraudulent, the petitioners cannot be punished for the same unless it is proved that the petitioners have played a role in the fraud. He submits that the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is complete. In support of his arguments, he has placed reliance on the following judgments: (i) Judgment of the High Court of Calcutta in the case of BASANTA KUMAR SHAW, PROPRIETOR OF M/S. N.M.D. ENGINEERING WORKS VS THE ASSISTANT COMMISSIONER OF REVENUE, COMMERCIAL TAXES AND STATE TAX, TAMLUK CHARGE & OTHERS, disposed of on 28.07.2022 in MAT 976/2022 with CAN 1/2022; and (ii) Judgment of Allahabad High Court in the case of M/S. R.M.DAIRY PRODUCTS LLP. VS STATE OF U.P. & THREE OTHERS, disposed of on 15.07.2021 in Writ Tax No.434/2021. 5. Before adverting to the validity of the orders impugned in these writ petitions, in the background of the challenge made to the impugned orders, it may be necessary to mention what is an electronic credit ledger in the CGST and how the ITC is availed and utilized by the registered dealer. In this regard, it would be useful to refer to paragraphs 9 to 19 of the judgment in Samay Alloys India Pvt. Ltd.'s case supra, which gives a fair idea as to what is an electronic credit ledger in GST and how the ITC is availed and utilized by the registered dealer. "9. Before we proceed to discuss the scope and applicability of Rule 86A, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e remaining SGST output liability. 14. Finally, the ITC is utilized in the following sequence to set off the IGST liability: (1) The ITC standing under the IGST is used to set off the IGST output liability. (2) The ITC standing under the CGST is used to set off the remaining IGST output liability. 15. Finally, the ITC standing under the SGST is used to set off the remaining IGST output liability. 16. Furthermore, no set off is available between the CGST and SGST. 17. Hence, from the above, it is clear how the electronic credit ledger is used while making the tax payment. What is Electronic Credit Ledger in GST? 18. The electronic credit ledger reflects the amount of Input Tax Credit available to the taxpayer. Thus, every claim of input tax credit of the registered taxpayer eligible for claiming such a credit is credited to this ledger. The amount available in the electronic credit ledger is utilized in making payments towards the outward tax liability by the registered taxpayer. 19. The electronic credit ledger shall be maintained in the form GST PMT - 02. This form shall be maintained on the common portal for every registered person eligible to claim input tax cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... biguity in interpretation of the provision to discern the legislative intent. 8. From a reading of Rule 86A of the Rules of 2017, it is seen that the first part of the Rule deals with the conditions that are required to be fulfilled in order to invoke the powers under the Rule, and the second part of the Rule provides for the consequences that would follow in case Rule 86A of the Rules of 2017 is invoked by the competent authority. As stated earlier, the foremost condition to enable the competent authority to invoke Rule 86A of the Rules of 2017 would be that credit of input tax should be available in the electronic credit ledger as on the date the competent authority decides to invoke Rule 86A of the Rules of 2017. Such credit which is available in the electronic credit ledger should be the result of fraudulent transactions. Unless the competent authority is fully satisfied that there is a prima facie case for invoking Rule 86A of the Rules of 2017, he cannot invoke Rule 86A, as the consequence/result of the same would be having a direct bearing not only on the business of the registered person, but also on his credentialities. In exercise of the powers under Rule 86A of the Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Disallow debit from the electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount. b) Such restriction should be for an amount equivalent to the amount claimed to have been fraudulently availed or is ineligible." 10. In S.S.Industries case supra, the Division Bench of Gujarat High Court at paragraph 65 has observed as under: "65. Our final conclusions may be summarized as under:- (I) The invocation of Rule 86A of the Rules for the purpose of blocking the input tax credit may be justified if the concerned authority or any other authority, empowered in law, is of the prima facie opinion based on some cogent materials that the ITC is sought to be availed based on fraudulent transactions like fake/bogus invoices etc. However, the subjective satisfaction should be based on some credible materials or information and also should be supported by supervening factor. It is not any and every material, howsoever vague and indefinite or distant remote or far-fetching, which would warrant the formation of the belief. (II) The power conferred upon the authority under Rule 86A of the Rules for blocki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined. There is no reason recorded by the Authority for exercising power under Rule 86A of the CGST Act, 2017 which would show independent application of mind that can constitute reasons to believe which is sine qua non for exercising power under Rule 86A of the CGST Rules. It is trite law that a speaking order has to be self sustainable and respondents at this stage cannot be allowed to justify the same by adding reasons to it by filing additional affidavits. From the reading of the order, it is evident that it is bereft of any material or 'reason to believe' that the petitioner is guilty of fraudulent transaction or is ineligible under Section 16 of the CGST Act." 13. From the aforesaid, it is evident that the powers under Rule 86A of the Rules of 2017 can be invoked or exercised by the competent authority only in the event he has reason to believe that the credit of input tax available in electronic credit ledger have been fraudulently availed or the assessee is ineligible for the same. The powers under Rule 86A of the Rules which are vested with the competent authority is subject to the satisfaction recorded by the said authority on he forming an opinion to the effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culled down portion, reference is made to the field visit report of the Assistant State Tax Officer, Vasco-D-Gama, Goa, and thereafter, in the preamble, Section 16(2) of the Act of 2017 and Rule 86A of the Rules of 2017 have been quoted, and thereafter, the aforesaid culled down portion of the order is found. On the overall reading of the impugned order, it appears that the competent authority has arrived at a conclusion on the basis of the field visit reports referred to in the impugned order, that the petitioners/assessees have availed ITC from the registered person who has been found non-existent or not to be conducting any business from any place, for which registration has been obtained by the said persons in contravention of the provision of the statute. The particulars of the input tax availed by such tax payer who is said to be not in existence are also given in the impugned order. The action of the respondents is being taken in the interest of the Revenue and it is only a preventive measure. The Court while considering the correctness of the said Act is entitled to examine whether there was any material available with the State Government and if such material is available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay High Court in the aforesaid case principally held that, the competent authority before invoking the power under Rule 86A of the Rules of 2017, is required to satisfy himself that the two important pre-requisites of the Rule is fulfilled before the power of blocking the electronic credit ledger or before disallowing of debit of ITC found in the electronic credit ledger is exercised. 18. The first requisite of the Rule which is required to be considered by the competent authority is with regard to the basis of material available before he taking any action for blocking of electronic credit ledger. The second pre-requisite is of recording the reasons in writing for invoking the powers under Rule 86A of the Rules of 2017. Unless the aforesaid two pre-requisites are fulfilled, the competent authority cannot invoke the powers under Rule 86A of the Rules of 2017 for the purpose of disallowing the debit of the determined amount to the electronic credit ledger or to block the electronic credit ledger even to the extent of amount fraudulently or wrongly availed by the petitioners/assessee. 19. Considering the necessity of fulfillment of the aforesaid two pre-requisites by the competent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecording of reasons in writing, in the present case, the competent authority has observed that the petitioners/assessee have availed ITC from registered persons who are found to be not in existence or not conducting any business from any place and the registration obtained by them was in contravention of the provisions of the Statute. The details of the input tax availed by such tax payer is also given in the impugned order. 22. The Bombay High Court in Dee Vee Projects Ltd.'s case supra at paragraphs 36 to 38 has observed as under: "36. The second pre-requisite of rule 86-A is of recording of reasons in writing. It comes with the use of the word "may", which, in our opinion, needs to be construed as conveying an imperative command of the rule maker, and that means, reasons must be recorded in writing in each and every case. This is because of the fact that any order which brings to bear adverse consequences upon the person against whom the order is passed, must disclose the reasons for it so that the person affected thereby would know why he is being made to suffer or otherwise he would not be able to seek appropriate redressal of his grievance arising from such an or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid background, the two basic pre- requisites for invoking Rule 86A of the Rules prima facie appears to have been fulfilled by respondent no.2. Considering the fact that the impugned orders have been issued based on the field visit report by the Assistant State Tax Officer of Goa, it cannot be said that respondent no.2 had no reason to believe the material made available to him. On the basis of such material, respondent no.2 has also observed that the petitioners/assessees have availed the ITC from fraudulent persons who are not in existence and not conducting any business and their registration itself was fraudulent. The particulars of input tax availed from such persons as found in the Electronic Credit Ledger is also furnished by respondent no.2 in the impugned orders and the ITC has been blocked only to the extent of the amount availed from those fraudulent persons/entities. 24. This Court, however, cannot ignore the fact that the power under Rule 86A of the Rules of 2017 is drastic in nature and in the event of the said power being exercised against an assessee, it disentitles him to avail of the credit in the electronic credit ledger for discharge of his tax liability w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C 78, the Hon'ble Supreme Court has held that the mere fact that reasons were required to be recorded in writing and the same will not substitute an opportunity of being heard and even if the Statute does not stipulate such a requirement, opportunity of showing cause must be afforded by way of compliance with minimal requirement of natural justice where the provision involves adverse civil consequences. 28. In Dee Vee Projects Ltd.'s case supra, the High Court of Bombay at paragraph 35 has observed as under: "35. As regards the following of principles of natural justice, the law is now well settled. In cases involving civil consequences, these principles would be required to be followed although, the width, amplitude and extent of their applicability may differ from case to case depending upon the nature of the power to be exercised and the speed with which the power is to be used. Usually, it would suppose prior hearing before it's exercise (See Swadeshi Cotton Mills Vs. Union of India : (1981) 1 SCC 664 and Nirma Industries Limited and another Vs. Securities and Exchange Board of India : (2013) 8 SCC 20). But, it is not necessary that such prior hearing would be gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivil consequences as a result of the said orders, raises a plea that invoking of the drastic power under Rule 86A was unwarranted and the same was done without holding a proper enquiry and the action was initiated based on a report which is not sound and proper, it becomes imperative to hear the assessee on these aspects of the matter. It is in this background, I am inclined to follow the principle stated by the High Court of Bombay in Dee Vee Projects Ltd.'s case supra, wherein it is held that given the nature of power provided under Rule 86A though the statute does not provide for a personal hearing before passing any order under the said Rule, it has to be read into the provisions of the said Rule which is not expressly provided therein, so that a post-decisional or remedial hearing could be granted to the person/assessee affected by blocking of his electronic credit ledger. 30. Considering the scope, applicability and the manner of power exercised by the competent authority under Rule 86A of the Rules of 2017, it may not be feasible for the authority to have a normal pre-decisional hearing and since the nature of order passed under Rule 86A is provisional, it would be reas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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