Laxmi Fine Chem

Versus

Assistant Commissioner

Citation: 2024 taxo.online 886 

In the case of Laxmi Fime Chem v. Assistant Commissioner, the petitioner challenged the action taken by the respondents in blocking input tax credit (ITC) amounting to Rs. 50.06 lakhs from 01.02.2024 to 13.02.2024. The petitioner argued that the ITC had been blocked without any prior show cause notice, and that the blocking of ITC resulted in a negative balance in the electronic credit ledger, which is contrary to Rule 86A of the CGST Rules, 2017. This rule only permits blocking ITC to the extent available in the electronic credit ledger, not creating a negative balance.

The court reviewed the material on record and heard the arguments from both sides. It was established that the respondents had indeed blocked the ITC without issuing a show cause notice, which is a violation of natural justice principles. Additionally, the court referred to a recent decision by the Gujarat High Court in the case of Samay Alloys India Pvt. Ltd. vs. State of Gujarat, which emphasized that Rule 86A only allows the blocking of the ITC that is already available in the electronic credit ledger. It does not permit creating a negative balance or blocking future credits.

The court concluded that the action of the respondents was not only in violation of Rule 86A but also contradicted previous judicial decisions. It was held that the respondents had no authority to create a negative balance in the petitioner's electronic credit ledger and that blocking ITC in this manner deprived the petitioner of their right to discharge liabilities and utilize available credits.

Furthermore, the court noted that in cases of wrongful or fraudulent availing of ITC, the appropriate course of action would be to initiate recovery proceedings under Section 73 or Section 74 of the CGST Act, rather than misapplying Rule 86A.

The court set aside the impugned order and directed the respondents to immediately recall the order of blockage. The judgment underscores the necessity of providing an opportunity for a personal hearing before taking adverse decisions against taxpayers, ensuring compliance with principles of natural justice. The respondents’ rights to initiate appropriate legal action as per the law were reserved.

This judgment highlights the importance of adhering to procedural fairness and the specific provisions of the law in administrative actions, reaffirming that any deviation from established rules and denial of natural justice cannot be sustained.

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