Gujarat HC Directed Revenue to unblock ex-Director’s ITC to recover Company’s VAT dues

The Hon’ble Gujarat High Court in Nipun A. Bhagat v. State of Gujarat [R/Special Civil Application No. 14931 of 2020, dated January 4, 2021] directed the Revenue (“Respondent”) to unblock the ITC lying in the electronic credit ledger of Nipun A. Bhagat (“Petitioner”), ex-director of the public company. The Respondent had firstly sent notice to the bank for attaching bank account of the company whose current director is Petitioner, but the bank refused to act. Thereafter, the Respondent had blocked the Petitioner’s ITC in the electronic credit ledger under Rule 86A of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) in order to recover the VAT dues of the public company where the Petitioner was previously a director.

Facts:-

The Petitioner is engaged in the business of manufacturing of brand kitchenware and home appliances and is registered under the provisions of the Central Goods and Services Tax Act, 2017 (“CGST Act”). The Petitioner was previously a director in public limited company named Dolphin Metals (India) Ltd. (“Dolphin Metals”) and is also a Director in one another company named Bhagat Marketing Private Limited since March 21, 1994.

The Respondent sent a Notice dated September 05, 2020 under Section 44 of the Gujarat Value Added Tax Act, 2003 (“GVAT Act”) to the Union Bank of India (“Bank“) proposing to attach the bank account maintained by Bhagat Marketing Private Limited, wherein the Petitioner was the Director, seeking recovery of the amount of outstanding tax and interest for the years 2006-07 to 2013-14 in the case of Dolphin Metals wherein the Petitioner was also a Director for some period of time but the Bank refused to act as per the notice.

Therefore, the Respondent blocked the ITC of amount Rs. 17,94,723/- available in electronic credit ledger of the Petitioner by exercising power under Rule 86A of the CGST Rules, so as to recover pending dues of tax and interest of Dolphin Metals under the GVAT Act for the period during which the Petitioner was not even a director.

The Petitioner submitted:

• That Articles 14 and 19(1)(g) of the Constitution, blocking ITC was patently bad, illegal and there is gross violation of the fundamental rights of the Petitioner. The directors of Dolphin Metals could not be held personally liable for the for the dues of Dolphin Metals and the same cannot be recovered from them as per the provisions of GVAT Act.
• That the dues can be recovered towards the liability incurred by Dolphin Metals from its directors after following the due process of the law as per the provisions of Section 179 of Income Tax Act, 1961 (“IT Act”) and Section 89 of the CGST Act. The GVAT Act does not empower the Respondent to do so.
• That Dolphin Metals was a public limited company and outstanding dues cannot be recovered from its director.
• That Rule 86A of the CGST Rules empowers the Commissioner or officer authorized to restrict the use of ITC from electronic credit ledger if the Commissioner has reasons to believe that the ITC has been fraudulently availed or is ineligible on the grounds stated in Rule 86A (1)(a) to (d) of the CGST Rules. Thus, blocking on the account of discharge of liability towards any other law is not permissible under Rule 86A of the CGST Rules.

The Respondent contented that:

• As per Section 18 of Central Sales Tax Act, 1956 (“CST Act”), every person who was a director of the private limited company at any time during the period for which the tax is due would be jointly and severally liable for payment of such tax. Hence, they could recover the amount of tax of Dolphin Metals by blocking ITC of the Petitioner.
• It was further highlighted that as per the provisions of Section 49(3) of the CGST Act, that the amount available in electronic credit ledger can be used for making any payment of tax, interest, penalty, fees or any other amount payable under the provisions of the CGST Act. Hence, in pursuance of an assessment or adjudication proceedings instituted, if any amount of tax becomes recoverable from the person, then the same is permissible to be recovered as an arrear of tax under the CGST Act.

Issue:-

Whether Petitioner’s challenge that action of the Respondent in blocking ITC in exercise of power under Rule 86A of the CGST Rules is patently bad and illegal.

Held:-

The Hon’ble Gujarat High Court in R/Special Civil Application No. 14931 of 2020, decided on January 4, 2021 held as under:

• Rejected the Respondent contention regarding Section 18 of the CST Act to state that Section 18 ibid specifically talks about private company and Dolphin Metals as per the facts of the case is indisputably a Public Company. Hence, the provisions of Section 18 of CST Act will not be applicable to the case.
• Held that Rule 86A of the CGST Rules can only be invoked if the Commissioner or the officer authorized by him has reasons to believe ITC available in the electronic credit ledger has been fraudulently availed or is ineligible on the grounds stated in Rule 86A(1)(a) to (d) of the CGST Rules. There is no reason for invoking Rule 86A of the CGST Act in the present matter.
• Relied on following cases to hold that unlike Section 179 of the IT Act there is no provision in the Sales Tax Act fastening the liability of Dolphin Metals to pay its sales tax dues on its directors:
  • Mr. Choksi v. State of Gujarat [R/Special Civil Application No. 243, 3103,7578 of 1991 decided on March 21, 2012]
  • Different Solution Marketing Private Ltd. v. State of Gujarat [R/Special Civil Application No. 19949 of 2015 decided on June 30, 2016]
  • Paras Shantilal Savla v. State of Gujarat [R/Special Civil Application No. 7801 of 2019 decided on June 27, 2019]
• Allowed writ application in favour of the Petitioner and directed the Respondent to unblock the ITC in the electronic credit ledger of the Petitioner.
• Clarified that the order would not preclude the department from recovering the dues of Dolphin Metals by any other mode of recovery permissible in law.

Our Comments:-

It is to be noted that recently, Rule 86A was challenged in Hon’ble Gujarat HC in the case of Kalpsutra Gujarat v. Union of India [R/Special Civil Application 10562 of 2020 decided on September 4, 2020] in so far as it gives power to block ITC at no fault of registered recipient and to declare it ultra vires of Section 16 of the CGST Act. The above-mentioned case is now listed for hearing on February 18, 2021.

Similarly, Rule 86A ibid was also challenged in the case of Surat Mercantile Association v. Union of India [R/Special Civil Application 15381 of 2020 dated December 4, 2020] for allowing blocking the electronic credit ledger unilaterally without issue of Show Cause Notice and without giving an opportunity of fair hearing. The above-mentioned case is also now listed for hearing on February 22, 2021.

Relevant Provisions:-

Rule 86A of the CGST Rules:

“Conditions of use of amount available in electronic credit ledger.-

(1) The Commissioner or an officer authorized by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-

i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained;

or

ii. without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.”

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