GST Credit Blocked? Not Without pre-decisional hearing Rules Supreme Court!

The petitioners, GST-registered businesses dealing in metals and scrap, had their Electronic Credit Ledgers (ECLs) blocked on June 27, 2023, by the GST authorities under Rule 86A of the CGST Rules, citing alleged fraudulent Input Tax Credit (ITC) based on investigation reports. The orders were passed without prior notice or independent application of mind. The Single Judge of the HC dismissed the writ petitions filed before it by the petitioner, challenging the blocking, on 27 July 2023. Aggrieved by the said order, the petitioner filed intra-court appeals before the Division Bench of the same High Court.

Issue Raised: Is it legally permissible to invoke Rule 86A and block ECL entries without conducting a pre-decisional hearing and establishing independent satisfaction?

HC’s Decision: The division bench of the High Court allowed the appeals, holding that Rule 86A is an extreme power that can only be used after the officer in question has been independently and objectively satisfied, based on concrete evidence. The Court underlined that, because of the grave civil ramifications involved, the principles of natural justice must be read into Rule 86A even in the absence of an explicit requirement. It concluded that the orders were mechanical, ambiguous, and based on borrowed satisfaction. As a result, the ECL blocking orders were lifted.

SC’s Decision: The State filed an SLP challenging the HC’s decision before the Apex Court, which was dismissed by the Supreme Court, noting a delay of 243 days and no sufficient cause shown. The Court, even while deciding the matter on merits, found no ground to interfere, thereby upholding the High Court’s ruling. The Supreme Court’s ruling essentially supports the need for fair procedures and a well-reasoned judgment when applying Rule 86A.

Click on the Link given below to Download the judgment of High Court and Supreme Court in this matter.