The Hon’ble High Court of Gujarat vide its order dated 23rd March 2022 in the matter of Milap Scrap Traders through Prop. Harshadbhai Manubhai Patel Vs State/Commercial Tax Officer in R/Special Civil Application No. 12986 OF 2021 held that the there cannot be a negative blocking of ITC in the electronic credit ledger under Rule 86A of the CGST rules when credit balance is not available in the electronic credit ledger. That Rule 86A is not the rule which allows the proper officer to make debit entries in the electronic credit ledger.
The writ applicant preferred the writ before the Hon’ble High Court seeking directions to the respondents to unblock the Input Tax Credit amounting to Rs. 7,68,554/- of CGST and ₹Rs.7,68,549/- of SGST totalling to Rs. 15,37,103/- and direct the respondent to allow the writ applicant to raise E-way Bills. Further, directions were sought to the respondents to allow the writ applicant to file GSTR – 3B return and not to recover interest and penalty for late filing of GSTR -3B return due to blockage of ITC.
- The Hon’ble High Court without going much in to the facts of the case noticed that the issue involved in matter is no longer res integra in view of the judgment of this (same) court in the matter of Samay Alloys India Pvt. Ltd. vs. State of Gujarat [Special Civil Application No.18059 of 2021 decided on 3rd February 2022] wherein it was held that:
- ‘Rule 86A of the CGST Rules empowers the Commissioner or his subordinates to freeze the debit in the electronic credit ledger provided he has reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible. Thus, the condition precedent is that the input tax credit should be available in the electronic credit ledger before the power under Rule 86-A is invoked by the authority. In the case on hand, it is not in dispute that the amount of input tax credit available in the electronic credit ledger as on the date of blocking of ledger was Nil. If no input tax credit was available in the ledger, the blocking of electronic credit ledger under Rule 86-A of the Rules and insertion of negative balance in the ledger would be wholly without jurisdiction and illegal.
- One of the primary conditions in order to invoke Rule 86A is that the Credit of input tax should be available in the electronic credit ledger. Further, such credit should be claimed to have been (supported by reason to believe recorded in writing) fraudulently availed.
- Accordingly, in case where (i) Credit of input tax is not available in the electronic credit ledger or (ii) such credit has already been utilised, the powers conferred under Rule 86A cannot be invoked.
- Further, Rule 86A is not the rule which entitled the proper officer to make debit entries in the electronic credit ledger of the registered person. The rule merely allows the proper officer to disallow the registered person debit from the electronic credit ledger for the limited period of time and on a provisional basis.
- The fact or possibility of registered person availing and utilising the fraudulent credit persistently and continuously cannot be the basis to invoke Rule 86A.
- The power to restrict debit from the electronic credit ledger is extremely harsh in nature. The rule outreaches the detailed procedure provided in the legislature for determination of input tax credit wrongly availed or utilised provided in Section 73 and 74 of CGST Act and empowers the officer to unilaterally impose certain restrictions in compelling circumstances. In other words, Rule 86A is invoked at a stage which is anterior to the finalization of an assessment or the raising of a demand. Accordingly, it should be governed strictly by specific statutory language which conditions the exercise of the power.
- For all the foregoing reasons, this writ application succeeds and is hereby allowed. The respondents are directed to withdraw negative block of the electronic credit ledger at the earliest. We rule that the condition precedent for exercise of power under Rule 86A of the GST Rules is the availability of credit in the electronic credit ledger which is alleged to be ineligible. If credit balance is available, then the authority may, for reasons to be recorded in writing, not allow the debit of amount equivalent to such credit. However, there is no power of negative block for credit to be availed in future.
- The Hon’ble High Court relying on the ratio laid down in the above judgment allowed the writ petition and directed the respondents to withdraw the negative blocking of Input Tax Credit available in the electronic credit ledger to the extent of 14,11,678/- and the remaining balance in the electronic credit ledger shall not be utilized by the writ applicant till the issuance of show cause notice, if any, under Section 73 or 74 of the CGST Act. Once the negative balance is removed, the writ applicant shall proceed to file his returns with the appropriate tax, penalty and interest, that may be determined in accordance with the law.
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