Power under Rule 86A relating to blocking of ITC in a taxpayer's ECL, can only be exercised if ITC is currently available in the ECL

Facts of the Case:-  The Petitioners challenged orders blocking their Input Tax Credit in their Electronic Credit Ledgers (ECL) beyond the available balance, resulting in a negative balance in the ECL.

Issue: Whether Rule 86A of the CGST Rules permits blocking of ITC in a taxpayer's ECL in excess of the credit balance available at the time of the order

Contentions of Petitioner: It was argued that Rule 86A of the CGST Rules only permits blocking ITC to the extent of credit already available in the ECL. It does not authorize blocking future ITC (i.e., ITC that is not yet available in the ECL). Further, contended that the rule must be interpreted literally, and any action that blocks ITC beyond what is currently available in the ECL is unauthorized.

The petitioners emphasize that the ITC in the ECL is a property of the taxpayer under Article 300A of the Constitution and cannot be restricted without explicit statutory authority. Reliance placed upon cases like Brand Equity Treaties Ltd. and Dee Vee Projects Ltd., wherein held that Rule 86A should be strictly construed, limiting blocking of ITC to only the available balance.

Contentions of Revenue:  It was argued that the intent behind Rule 86A is to prevent the utilization of ITC that is fraudulently availed or ineligible. Hence, the Commissioner is authorized to block an amount equivalent to the ITC in question, irrespective of whether that ITC is currently available in the ECL. 

Also, contends that Rule 86A should be interpreted purposively, considering the objective of preventing fraudulent claims. This could include blocking an amount greater than the current balance if fraudulent ITC was availed previously. Restricting the power to only block available credit would require continuous monitoring of a taxpayer’s ECL, adding an administrative burden. A broader interpretation of Rule 86A avoids this issue.

Further, contended that ITC is a privilege, not an absolute right, and may be restricted if the credit is fraudulently availed. Restricting the power to block only available credit could lead to a situation where multiple blocking orders are required, potentially extending the effective duration of the freeze beyond a year.

Observations of the Court: 

The High Court observed as under:

A. Interpretation of Rule 86A:  The plain reading of Rule 86A requires that two conditions are fulfilled before blocking the debit of ITC: a) There must be ITC available in the ECL (b) There must be “reasons to believe” that the available ITC was fraudulently availed or is ineligible.

The Court noted that Revenue's contention that the phrase “amount equivalent to such credit” refers to past ITC that may have been fraudulently availed and used, even if no ITC is available at present, is rejected by the Court.

The Court also referred to other judgments, particularly the Calcutta High Court decision in Basanta Kumar Shaw and the Allahabad High Court decision in R.M. Dairy Products LLP, where it was held that “available in the electronic credit ledger” refers to ITC presently in the ECL. The Court disagrees with these decisions, noting that they misinterpret the rule by conflating the terms “availed” and “available.”

B. Statutory Context of Section 41:  Section 41 of the CGST Act governs the “availment” of ITC, meaning that once the ITC is credited to the ECL, it is available for use or refund. Section 49(4) specifies that ITC available in the ECL can be used to discharge tax liabilities. The statutory provisions clarify that the ITC in question must be currently available in the ECL to be blocked under Rule 86A.

C. Interpretation of Circular CBEC-20/16/05/2021-GST dated 02.11.2021:  The Court also examines the relevant CBIC Circular, emphasizing that the blocking of ITC under Rule 86A must be proportional to the suspected fraudulently availed or ineligible ITC.

Decision of Court: 

• The Court holds that Rule 86A only applies to ITC currently available in the ECL and cannot be invoked for ITC already utilized.
• The blocking of ITC under Rule 86A must be confined to the amount of ITC currently available in the ECL, which the officer has reasons to believe is fraudulently availed or ineligible.
• The Gujarat and Telangana High Courts had ruled similarly, stating that blocking more than the available ITC or inserting a negative balance in the ECL is illegal.
• Orders under Rule 86A are temporary and do not require a show-cause notice, but they must be supported by valid reasoning. They cannot be used as a permanent tax recovery measure, which falls under Sections 73 and 74 of the CGST Act.
• The impugned orders in these petitions that blocked an amount exceeding the available ITC in the ECL have been set aside.

To read the complete judgment 2024 Taxo.online 2228