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February 10, 2021

Gujarat High Court directs release of ITC available in the Electronic Credit Ledger

by Admin in GST

Gujarat High Court directs release of ITC available in the Electronic Credit Ledger

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

All eligible Input Tax Credit that is claimed by a registered dealer in the GST returns reflects in Electronic Cash Ledger. Credit in Electronic Cash Ledger can be used only for payment of tax. This means that balance of Electronic Credit Ledger cannot be utilised for payment of interest, penalty or late fees. Interest and Penalty can be paid only through actual cash payment.

Rule 86A provides vide powers to the Commissioner or an officer authorized by him to impose restrictions on ITC available in the electronic credit ledger (ECL), in a case where there were reasons to believe that the ITC was fraudulently availed or was ineligible.

The Commissioner had the authority to utilize the power under Rule 86A in the following cases:

  • non-existent supplier/recipient or not conducting business from its registered place
  • the tax has not been deposited with Government
  • issuance of invoice without supply, and
  • recipient not in possession of invoice/debit note

The said Rule also specifies that on account of the said restriction, the ITC would not be allowed to be used to discharge the output GST liability or claim refund of any unutilized amount for a period of 1 year.

Let us refer to the case of Nipun Bhagat vs State of Gujarat where the applicant sought to challenge the action of the respondent in blocking the ITC in exercise of power under Rule 86A of the CGST Rules, 2017 to the tune of Rs.17,94,723 allegedly towards effecting the recovery of dues under the Gujarat Value Added Tax Act, 2003 (GVAT Act) in the case of one Dolphin Metals (India) Ltd.

Facts of the Case:

  • The applicant was engaged in the business of manufacturing of brand kitchenware and home appliances and was registered under the provisions of the CGST Act.
  • The writ applicant, at one point of time, was a Director in a public limited company named Dolphin Metals (India) Ltd.
  • The writ applicant was also a director in one another company named Bhagat Marketing Private Limited.
  • The respondent sent a notice under Section 44 of the GVAT Act to the Union Bank of India proposing to attach the bank account maintained by Bhagat Marketing Private Limited, wherein the applicant was a Director, seeking recovery of the amount of outstanding tax and interest for the years 2006-07 to 2013-14 in the case of Dolphin Metals.
  • The bank declined to act as per the notice as the name and PAN of the account holder differed from that of the Dolphin Metals to whom the notices were addressed.
  • The respondent, on the very same day blocked the ITC of the amount of Rs.17,94,723 available to the applicant in his electronic credit ledger under the provisions of the CGST Act.
  • This action was with an intention to recover the amount of tax and interest due and payable by the Dolphin Metals under the GVAT Act for the period during which the writ applicant was not even the Director.
  • The applicant addressed a letter to the respondent requesting to release the ITC blocked for the recovery of the amount of tax and interest.
  • As the respondent declined to release the ITC, the applicant petitioned before the High Court (HC)

Observations of the High Court (HC)

  • The issue before HC was whether the respondent could have exercised power under Rule 86A of the Rules, 2017 for the purpose of blocking ITC available in the credit ledger account of the applicant for the purpose of recovering the dues of Dolphin Metals (India) Limited.
  • In HC’s opinion, the answer was in the negative.
  • Rule 86A could be invoked only if the conditions stipulated therein were fulfilled.
  • In other words, it was only if the Commissioner or an Officer authorized by him had reasons to believe that the credit of input tax available in the electronic credit ledger was fraudulently availed or was ineligible for the reasons stated in Rule 86A(1)(a) to (d) that the authority would get the jurisdiction to exercise the power under Rule 86A of the Rules.
  • HC failed to understand how Rule 86A could have been invoked in the present matter.
  • In view of the aforesaid, HC was left with no other option but to allow the application.

The respondent was therefore directed to unblock the input tax credit available in the credit ledger account of the writ applicant at the earliest.

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