blocking of recipient’s credit ledger on account of default of a supplier is wanting of statutory authority

Fact and issue of the case

Having regard to the facts of the present litigation and also considering the present day scenario of the
implementation of the Goods and Services Tax, Act, 2017, the following observations by the Constitution Bench of the Supreme Court in the case of Pannalal Binjraj vs. Union of India, AIR 1957 SC 397 are apt:

All that we need to do is to erase the expression “provisions of the Income Tax Act” and replace the same with the expression “provisions of the Goods and Services Tax Act, 2017”.

The writ applicant is a proprietary concern. It is engaged in the trading of M.S. Scrap past 13 years. The proprietary firm purchases the scraps from different suppliers and sale the same to different entities. In the case on hand, the writ applicant is said to have purchased M.S. Scrap from one of its suppliers namely, M/s. Anmol Enterprise during the period between 22.12.2020 and 27.03.2021.

It is the case of the writ applicant that when it received the goods from the said supplier, it also received tax invoices, weighment slips, e-way bills etc. which are the documents prescribed for the purchase under the provisions of the CGST Act, 2017. It is also the case of the writ applicant that the
purchase made by it were duly reflected in the Form GSTR – 3B, Form GSTR – 2A and Form GSTR – 2B respectively. It appears that one day, it came to the notice of the writ applicant that the respondent no.3 herein had blocked the ITC in exercise of power under Rule 86A of the Rules to the tune of Rs.97,17,290/- (Rupees Ninety Seven Lakhs Seventeen Thousand Two Hundred and Ninety Only) on the purchases
made from M/s. Anmol Enterprise.

It is the case of the writ applicant that he came to know about such blocking of the ITC through E-mail and SMS on 28.07.2021. Upon receipt of an E-mail and SMS referred to above, the writ applicant checked up with the GST portal wherein it is was displayed that the ITC had been blocked by the respondent no.3 without assigning any reasons. It is the case of the writ applicant that he inquired with the respondent
no.3 as to on what basis, the ITC was blocked but, there was no response at the end of the respondent no.3. In such circumstances referred to above, the writ applicant is here before this Court with the present writ application.

Mr. Modh, the learned counsel appearing for the writ applicant would submit that it was expected of the respondent no.3 to atleast convey the reasons, if not in details atleast in brief, for blocking the ITC under Rule 86A of the Rules. Mr. Modh would submit that without any reasons how would a dealer come to know as to why his ITC has been blocked. He would submit that all the transactions of his client with M/s.
Anmol Enterprise are clean. If there is any information or material with the department to doubt the credentials of M/s. Anmol Enterprise then for such reason alone, the ITC of the writ applicant could not have been blocked. In other words, what Mr. Modh is trying to convey is that his client is a bona fide purchaser of the goods. The goods were delivered in accordance with law. In such circumstances referred to above, Mr. Modh prays that there being merit in his writ application, the same be allowed and the impugned order/action on the part of the respondent no.3 in blocking the ITC be quashed and set aside. On the other hand, this writ application has been vehemently opposed by Mr. Utkarsh Sharma, the learned AGP appearing for the respondents. Mr. Sharma would submit that having regard to the satisfaction arrived at by the authority based on some information/material, it cannot be said that the
action on the part of the respondent no.3 in blocking the ITC is illegal. Mr. Sharma, upon the request made by this Court has made available the satisfaction note dated 28.07.2021.

Observation of the court

Before we close this judgment, we must observe something as regards Section 43A of the Act, 2018.

Rule 86A may subject a bona fide assessee to undue hardship by the blockage of his credit ledger due to the default of his supplier. This may tantamount to equating the default of the recipient with that of the supplier. Section 43A was inserted into the Act vide the CGST (Amendment) Act, 2018. Section 43A(6) provides that the supplier and the recipient of a supply 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.

However, section 43A has not been notified yet. Therefore, the same does not apply. In the absence of section 43A being notified, this power has not been contemplated by the Act. Further, the notification of rule 86A prior to the section 43A is indicative of the fact that the rule did not intend to draw the validity from section 43A. Thus, the 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.

On the perusal of the aforesaid provisions, it can be said that there is a specific mechanism for reversing the credit in the case of a discrepancy in the ITC availed by the recipient, against the output liability of the supplier. However, the ITC reversal mechanism, as laid down in section 41 read with
Rules, is kept in abeyance. The facility to furnish GSTR – 2 and GSTR – 3 Forms is also not available. Accordingly, 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 the invoice issued by customer.

It has been held in a catena of judgments that a bona fide recipient should be made to suffer on account of a supplier’s default. In Quest Merchandising India Pvt. Ltd. v. Govt. of NCT of Delhi, W.P. (C) 6093 of 2017 dated 26.10.2017 (Delhi High Court), the assessee had duly paid the tax to the supplier, but the supplier had not deposited the tax with the Government. The assessee argued that the purchasing dealer can check on the web portal of the department if the selling dealer is a fictitious person or a person whose registration stands cancelled. The Court held that the purchasing dealer was being asked to do the impossible, i.e. to anticipate the selling dealer who will not deposit the tax collected by him from such purchasing dealers to the Government, and therefore avoid transacting with such selling dealers. The Delhi High Court read down the concerned provision to not include a buyer who has bona fide entered into the purchase transactions with validly registered dealers who have issued the tax invoices against the transaction. The Court explained that such provision, if not read down, is violative of Article 14 of the Constitution for being inherently arbitrary. The only case when such provision applies is if the tax authorities come across some material to show that the purchasing dealer and the selling dealer, acted in collusion in detriment to the exchequer. However, in the event that the selling dealer has failed to deposit the tax collected, the remedy for the authorities is to proceed against the defaulting selling dealer to
recover such tax and not to deny the purchasing dealer his input. The Supreme Court affirmed the said case and dismissed the Revenue’s petition seeking special leave to appeal against this decision.

In Sri Vinayaga Agencies v. Assistant Commissioner, W.P. Nos. 2036 to 2038 of 2013, dated 29.01.2013 (Madras High Court), the Madras High Court held that law does not empower the tax authorities to reverse the ITC availed, on a plea that the selling dealer has not deposited the tax. It can revoke the input credit only if it relates to the incorrect, incomplete or improper claim of such credit.

The need for the law to distinguish between honest and dishonest dealers was acknowledged by the Punjab and Haryana High Court in Gheru Lal Bal Chand v. State of Haryana, Civil Writ Petition No.6573 of 2007, decided on 23.09.2011 where the constitutional validity of Section 8 of the Haryana DVAT Act, 2003 (‘HVAT Act’) was being considered.

In the result, this writ application succeed in part and is partly allowed accordingly. The impugned order of blocking of the ECL of the writ applicant is hereby quashed and set aside. The respondents are at liberty to pass a fresh order under Rule 86A of the Central Goods and Service Tax Rules, 2017 in accordance with law and in the light of the observations made hereinabove.