When there is “reason to believe” that a credit is fraudulent or ineligible, the ITC might be blocked under Rule 86A.
Facts and issues of the case
Aggrieved by the action of the respondents of blocking his Input Tax Credit by proceeding under Rule 86A of the Central Goods and Services Tax Rules, 2017 (for short, the CGST Rules), the petitioner has approached this Court seeking quashing of the order dated 17th of December, 2021 (Annexure P-18).
The petitioner, a Public Limited Company is engaged in manufacturing of copper wire rod and submersible winding wire and is registered under the Central Goods and Services Tax Act, 2017. As per the petitioner, respondents blocked Input Tax Credit amounting to Rs.1.9 Crore lying in Electronic Credit Ledger on 2nd of September, 2021. The petitioner filed representations objecting to such action of the respondents which remained undecided.
Observation by the court
The petitioner submitted a detailed written submission on 10th of December, 2021 in support of his representation. Respondent vide order dated 17th December, 2021 rejected the representation of the petitioner seeking unblocking of its Input Tax Credit. It is the aforesaid order that the petitioner has impugned in the present writ petition.
Ld. Senior Counsel for the petitioner submits that as per the impugned order the basis for initiating action against the petitioner is a communication received from Delhi North Commissionerate, as per which one of the suppliers of the petitioner is found to be non-existing. He submits that the said supplier is one M/s Bhagwati Metals. He submits that Show Cause Notice for cancellation of registration was issued to M/s Bhagwati Metals on 5th February, 2021. The same was however dropped vide order dated 23rd February, 2021 and the suspension of registration of said M/s Bhagwati Metals was revoked by the said communication which is placed on record as Annexure P-20. His contention is thus that once the very basis of proceeding against the petitioner stands withdrawn by the respondents themselves and that too on 23rd of February, 2021, there was no reason to block the Input Tax Credit of the petitioner in September, 2021 and, thus, the impugned order dated 17th of December, 2021 deserves to be set aside.
He further submits that the intent and purport of Rule 86A is to secure interest of revenue and it is sort of preventive measure. The petitioner is a running manufacturing unit having turn-over running into multiple Crores, thus there is no possibility of fly by night. The interest of revenue is always secured. The mis-appropriation or fraud, if any has been committed by suppliers of the petitioner for which petitioner cannot be deprived from his valuable right of ITC. The denial of ITC is violative of Article 19(1)(g) and Article 21 of the Constitution of India.Per contra, Ld. Senior Standing Counsel for the respondents would contend that though the proceedings against M/s Bhagwati Metals initiated vide Show Cause Notice dated 5th of February, 2021 were dropped vide order dated 23rd February, 2021 (Annexure P-20) however, on 1st July, 2021, the proceedings against the said M/s Bhagwati Metals were again initiated and the GSTIN was thereafter cancelled on 27th of July, 2021.
Court had heard Ld. Counsel for the parties and have carefully gone through the records of the case.The respondents have proceeded against the petitioner in exercise of power conferred under Rule 86A of the CGST Rules.From bare perusal of the aforesaid provision, it is evident that the power under Rule 86A of the CGST Rules is exercised where the prescribed officer has reason to believe that credit of input tax available in the Electronic Credit Ledger has been fraudulently availed or the assessee is ineligible. The exercise vested in the prescribed Authority is subject to a satisfaction recorded by the said Authority and forming opinion to the effect that the Credit Ledger has been fraudulently availed or the assessee is ineligible in the situations as prescribed under the Rule itself.
The impugned order in the present case when tested on the touchstone of the provision contained in Rule 86A and the law referred to herein above, Court found that the reason to invoke the power conferred under Rule 86A of CGST Rules against the petitioner is an intelligence report received from Principal Chief Commissioner, Central Excise and Central Tax, Vadodara Zone regarding a racket of firms indulging in fake judicial and passing of illicit ITC. Merely by recording that some investigation is going-on a drastic far-reaching action under Rule 86A of the CGST Rules cannot be sustained. 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.
Needless to say that it shall be open to the respondents to proceed against the petitioner in case any incriminating material is found during investigation which can form basis of independent opinion as contemplated under the Act.Rajnandini-Metal-Ltd-Vs-Union-of-India-and-Others-Punjab-and-Haryana-HC.