The Hon’ble High Court of Delhi vide its order dated 05.12.2022 in the matte of Sunny Jain Vs. Union of India and Ors. in W.P.(C) 6444/2022, CM Nos.19502/2022 & 33763/2022, found that blocking of Electronic Credit Ledger of the Assessee under Rule 86A of the CGST Rules, 2017 without informing him, on the ground that the Input Tax Credit has been availed without the payment of consideration to the suppliers is without authority of law.  It was found that the Assessee is entitled to avail the benefit of ITC even prior to making the payment to the supplier.

The Petitioner filed the writ petition before the Hon’ble High Court challenging the action of respondents in blocking the Input Tax Credit (hereafter ‘the ITC’) of Rs. 1,37,17,022/- (IGST of ₹1,29,80,631/- and CGST of RS. 7,36,391/-), which is credited in the Electronic Credit Ledger (hereafter ‘ECL’) of the petitioner. The said ITC was blocked on 11.02.2020.

Facts of the Case: –

• That the respondents sent an e-mail dated 01.04.2022, informing the petitioner that ITC has been “unblocked blocked. It is a claim of the petitioner that prior to that on 07.09.2021, he had filed a letter with respondent no.3 raising a grievance that his ECL had been locked for a period of eighteen months without any intimation or enquiry.
• Before the respondents, it was also contended by the Petitioner that it is impermissible to block ECL for a period exceeding one year. Accordingly, a request was made to the respondents to unblock his ECL, however, the respondents did not accede to the same.
• The Petitioner sent an e-mail dated 06.10.2021 to the office of respondent nos.3,4 and 5 (Anti Evasion Office CGST, Delhi), requesting the respondents to furnish the list of documents required for unblocking the ECL. In response, the respondents asked the petitioner to submit certain documents, which were duly furnished by the Petitioner.  Subsequent to which, the petitioner further furnished documents vide his communication dated 18.10.2021 & 02.11.2021.
• Thereafter, a letter dated 12.11.2021 was issued to the petitioner by Respondent No. 2 to deposit interest on account of non-payment of consideration to supplier (D.G. Impex), within a period of 180 days as required in terms of Section 16(2) of the Central Goods and Services Tax Act, 2017 and Rule 37 of the CGST Rules, 2017.
• The Petitioner disputed the said demand on the ground that he has not utilized the ITC and thus, he is not required to pay any interest. Further, it was submitted that recovery of interest cannot be effected without issuing a show cause notice and initiating proceedings to adjudicate the same.
• That a system generated e-mail dated 01.04.2022 was received by the petitioner from the GST portal informing him that the ITC available in the ECL has been “blocked/unblocked by Shri/Mr/Ms 10037590, Assistant Commissioner, Range-13.” Another e-mail was received by the petitioner on the same day informing him that the ECL has been “blocked/unblocked by Shri/Mr/Ms 10055109, Deputy Commissioner, Range-13”. Thus, the ECL of the petitioner was unblocked on 01.04.2022 and was again blocked on the same date.

It was submitted on the behalf of the respondents, that the ECL of the petitioner was blocked pursuant to an e-mail dated 11.02.2020, received from Directorate General of Analysis and Risk Management (DGARM).  The said email enclosed a list of tax payers who had allegedly availed inadmissible ITC during the period 2017-18 and 2018-19, and the petitioner’s name was included in the said list.  they have reason to believe that the ITC available in the ECL of the petitioner had been wrongly availed and therefore, the same was blocked on 11.02.2020.

Held: –

• The Hon’ble Court after considering the submissions made and facts of the case, found that the petitioner is engaged in the business and supply of mobiles and mobile parts under the name ‘Mahavir Impex’. The allegation against the petitioner is that he had not paid the consideration for supplies received from D.G. Impex within the period of 180 days and therefore, was liable to pay interest under Section 16(2)(d) of the CGST Act.  That rule 86A of the CGST Rules entitles the Commissioner or any officer authorized by him in this behalf, not below the rank of Assistant Commissioner, to not permit debit (utilization) of the ITC lying to the credit in the ECR of a taxpayer in certain circumstances.  Admittedly, the action of the respondents to block the petitioner’s ITC lying in his ECR is in exercise of the power under Rule 86A of the CGST Rules in the present case.
• The Hon’ble Court on perusal of Rule 86A found that a plain reading of the rule, indicates that the restriction, as prescribed under Rule 86A(1) of the CGST Rules, can be imposed only where the ITC available in the ECR has been “fraudulently availed” or is “ineligible” as specified in the said Sub-Rule.
• That in the present case, there is no allegation that the petitioner has fraudulently availed the ITC lying to the petitioner’s credit in the ECR, and it has been contended on the behalf of the revenue that the only reason for blocking ITC in the petitioner ECR was that he was not eligible to avail the same in view of Section 16 (2) of the CGST Act.
• It was found by the Hon’ble Court that blocking of ITC effectively restricts the assessee from using the ITC for discharging his liabilities. It is a drastic measure and therefore, can only be done when the conditions for taking such measures are met.  It is trite law that statutory provisions empowering harsh measures such as freezing the assets of a person, have to be strictly construed.
• The Hon’ble Court taking note of decision of Hon’ble Supreme Court in CST v. Modi Sugar Mills Ltd.: (1961) 2 SCR 189, wherein it was held that ‘In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions’, found that The words “inasmuch as” as used in Rule 86A(1) of the CGST Rules qualify the word “ineligible”. The expression “inasmuch as” is not of a wide import; it is used in a restrictive sense to qualify the subject.
• Further, If the expression “inasmuch as” is considered as synonymous with ‘because’ or ‘since’, the sub clauses of Rule 86A (1) of the CGST Rules would qualify the word “ineligible” and exclude the possibility of expanding the import of the said word.
• The Hon’ble Court taking note of the meaning of ‘inasmuch’ as defined in Oxford English Dictionary, found that the expression “inasmuch as” cannot be considered as an expression that is used in an expansive sense, it qualifies the subject and restricts the provision that it qualifies. The use of the expression “inasmuch as” restricts the scope of ineligibility to the conditions as set out in sub clauses of Rule 86A(1) of the CGST Rules. It is only if any of these conditions are satisfied that the restriction under Rule 86A (1) can be imposed in respect of ITC on the ground that the ITC available in the taxpayer’s ECL is ‘ineligible’
• Thereafter the Hon’ble Court referring to the provisions of Section 16, found that second proviso to Section 16 (2) of the CGST Act, provides the consequences where the recipient of goods/services fails to pay the consideration of those goods/services to the supplier within a period of 180 days from the date of issue of the invoice by the supplier. This provision is to address a situation where the recipient of taxable goods or services or both, avails the ITC without, in fact, paying for the same. Resultantly, the taxpayer avails of a reduction in his output liability against liability which he has not discharged. In such a circumstance, the amount equal to the ITC availed by the recipient is added to his output liability along with interest payable thereon.
• Further, it was found by the Hon’ble Court that it is clearly not the scheme of the CGST Act, to restrain a person from availing the ITC till he has paid the supplier for such goods/services. A recipient of goods/services who receives goods and services on supplier’s credit is also entitled to avail the ITC. However, if he fails to discharge his liability within a period of 180 days (one hundred and eighty days), he is liable to discharge the benefit of the ITC along with interest.
• The third proviso to Section 16(2) of the CGST Act further specifies that in the event the recipient pays the amount due towards the value of the supply of goods or services or both, along with the tax payable thereon, the recipient would be entitled to avail of the ITC. The second and third provisos to Section 16(2) of the CGST Act make it amply clear that a party is not disentitled to avail the ITC in respect of goods/services prior to his discharging the liability to pay the supplier for such goods/services and tax thereon.
• The Hon’ble Court after the perusal of Rule 37 found that a conjoint reading of Rule 37 of the CGST Rules and the proviso to Section 16(2) of the CGST Act leaves no room for doubt that a taxpayer is entitled to avail of ITC in the first instance even though he has not paid the supplier for the goods/services. He has to, however, reverse the same with interest by including the amount of ITC availed as a part of his output liability, if he does not make the payment to the supplier within the stipulated period of 180 days.
• The Hon’ble Court thereafter, refraining from examining the question ‘that in terms of 86A (3) of the CGST Rules, the restrictions imposed under Rule 86A of the CGST Rules cannot extend beyond the period of one year from the date of imposing such restriction’, as the said issue was not addressed in the petition, found that in the given facts and circumstances of the case, the action of the respondents to continue blocking the ITC available in the ECR of the petitioner for such extended period is without the authority of law. Therefore, the respondents are directed to forthwith unblock the ITC available to the petitioner in his ECR.

The Hon’ble Court with the above findings, disposed of the writ petition.  It is clarified that nothing stated in this order would preclude the respondents from taking such steps as are necessary for recovering any ITC along with interest from the assessee, if the same is otherwise required to be added to the petitioner’s output liability in terms of the second proviso to Section 16 of the CGST Act.