Rule 86A can be invoked even if there is a NIL credit balance at the time of invoking the Rule: HC

The Hon’ble High Court of Calcutta in its decision on 28^th July 2022, based on the various decisions on Blocking of Input Tax Credit- held the Negative Balance to be Lawful and Valid.

The Hon’ble Court mainly based its decision on the following two points:

1. Whether the right to claim tax credit is a vested right?
2. Whether rule 86A can be invoked where the electronic credit ledger balance is NIL?

A vested right is the ability to claim a tax credit. The appellant cannot be heard to argue that using the input tax credit is a vested right in light of the established legal position.

In the light of the settled legal position, the appellant cannot be heard to contend that the availment of the input tax credit is a vested right. The right conferred on the appellant is regulated by the provisions of the Act and it is a concession granted under the statute unless and until the appellant complies with all the conditions scrupulously, they would not be entitled to avail of the input tax credit. The Hon’ble court relied on Jayam & Co. Versus Assistant Commissioner (Ct) and Another, in the context of the Tamil Nadu Value Added Tax Act held that input tax credit is a concession and to be entitled to such credit the condition stipulated under the provisions has to be strictly complied with.

Rule 86A can be invoked even if there is a NIL credit balance at the time of invoking the said rule.

Plainly, the Rule does not contemplate any recovery of tax due from an assessee. It only provides, in certain situations and upon certain conditions being fulfilled, that the specified amount may be held back and not allowed to be utilized by the assessee towards discharge of its liabilities on the outward tax or towards refund. It creates a lien without actual recovery being made or attempted.

The words ‘input tax available’ used in the first part of sub-rule (1) of Rule 86-A cannot be read as actual input tax available on the date of the order passed under that Rule. Those words are relevant for the purpose of laying down the first condition for the exercise of power by the Commissioner or the authorized officer. Thus, for a valid exercise of power, the authorized officer must have ‘reasons to believe that any credit of ‘input tax available’ (i.e., available in the electronic credit ledger of an assessee) had either been fraudulently availed or the assessee was not eligible to avail the same.

The words ‘input tax available’ has to be read only in the context of the infringement being alleged by the revenue, i.e., fraudulent availment or availment dehors eligibility to the same. Consequently, if an assessee is found to have either fraudulently availed or to have availed such ‘input tax credit’ that he was ineligible to avail of, he may expose himself to action under the Rule in the future, when such an event may come to the knowledge of the authorized officer, subject of course to the rule of limitation.

Thus, the word ‘available’ used in the first part of sub-Rules of Rule 86-A would always relate back in time when the assessee allegedly availed input tax credit either fraudulently or which he was not eligible to avail. It does not refer to and, therefore, does not relate to the input tax credit available on the date of Rule 86-A being invoked. The word “has been” used in Rule 86-A (1) leaves no manner of doubt in that regard.

The Court pointed out that in the case where credit is fraudulently availed and utilized, proper proceedings under the provisions of Section 73 or Section 74 as the case may be, can be initiated, and further, Rule 86A is not the Rule which provides for debarring the registered person from using the facility of making payment through electronic credit ledger. Further, Rule 86A is invoked at a stage which is prior to the finalization of the assessment or raising a demand.

The appellant has used the expression “negative blocking”. We find no such expression in Rule 86 A. It appears that such expression is used in common parlance among dealers. If the statute does not use the expression negative balance, such a theory cannot be imported to justify the contention that there should be a positive balance to invoke Rule 86 A. Such interpretation would render the rule redundant and it can also reward the assessee at times. Thus, we are of the clear view that the Rule 86A (1) read in its entirety will clearly show that there is no requirement under the Rule that the electronic credit ledger should contain sufficient balance for the purpose of blocking the credit by invoking the said rule.

As the electronic credit ledger was blocked, the appellant was not prevented from carrying on his business activities, all that has been done is to prevent him from operating the electronic credit ledger. Thus, the appellant would be free to carry on his business activities by effecting payment of the requisite amount of tax into his account and all that has been prevented is that the appellant would not be entitled to adjust the tax by availing the credit, if available in his electronic credit ledger.

Thus, the court did not interfere with the order passed by the learned Single Bench and the appeal was dismissed.

To read the Judgment Click Here.