Department Cannot Block GST ITC Without Assigning Any Reason: Gujarat High Court

Department Cannot Block GST ITC Without Assigning Any Reason: Gujarat High Court Justice J.B. Pardiwala and Justice Nisha M. Thakore of the Gujarat High Court have ruled that the department cannot deny the assessee the Input Tax Credit (ITC) without providing a cause. For the past 13 years, the writ petitioner/assessee, a proprietary concern, has been in the business of trading in M.S. scrap. The private company buys scraps from various vendors and sells them to various businesses. During the period 22.12.2020 to 27.03.2021, the assessee purchased M.S. Scrap from one of its suppliers, M/s Anmol Enterprise. At the time when the assessee received the items from the supplier, along with tax invoices, weighment slips, e-way bills, and other documents required by the CGST Act, 2017. The purchases were properly recorded on Forms GSTR-3B, GSTR-2A, and GSTR-2B, respectively. The assessee was informed one day that the respondent/department has barred the ITC in the amount of Rs. 97,17,290 on purchases made from M/s. Anmol Enterprise, as a result of the exercise of power under Rule 86A of the CGST Rules. On July 28, 2021, the assessee received notification of the ITC’s banning via e-mail and SMS. The assessee examined the GST portal after receiving an e-mail and SMS, where it was displayed that the ITC had been blocked by the department without any explanation. The assessee enquired with the department as to why the ITC was denied, but received no response from the government’s end. The assessee’s counsel argued that the department was required to at least express the reasons for blocking the ITC under Rule 86A of the CGST Rules, if not in full, at least in a brief manner. Counsel representing the assessee argued that a dealer would have no way of knowing why his ITC had been blocked if there were no grounds given. His client’s transactions with M/s. Anmol Enterprise were flawless. If the department had any information or material that made them doubt M/s. Anmol Enterprise’s credentials, the assessee’s ITC could not have been blocked for that reason alone. The assessee had purchased the products in good faith. The things were supplied in a legal and timely manner. The respondent's counsel, on the other hand, argued that the authorities’ satisfaction was based on some information or material, and therefore the department’s action in blocking the ITC was not illegal. The respondent’s counsel argued that the investigation should continue. Despite the fact that 7 months have passed after the ITC was banned, he admitted that no show cause notice has been issued under Section 73 or 74 of the CGST Act until now. The purpose of blocking the ITC under Rule 86A of the CGST Rules, according to counsel for the respondent, was to preserve the Revenue’s interests. If the proper officers have grounds to believe that the activities or invoices are suspicious, they can use Rule 86A of the CGST Rules to take extreme measures. The “reason to believe” standard is used in Rule 86A. The “reason to believe” must be rationally related to or important to the belief’s creation. It’s a personal term that might mean different things to different people. At first glance, it appears that Rule 86A does not allow for the issuance of a show-cause or intimation notice. When the individual who is affected goes to the site to pay taxes and discovers that his ITC is not available, he may be taken aback. Before the power of disallowing debit of an appropriate amount to the Electronic Credit Ledger or blocking ECL to the extent of the amount illegally or wrongfully availed of is used under Rule 86A of the CGST Rules, two requirements must be met. Firstly, the Competent Authority or the Commissioner must be satisfied that blocking of the electronic credit ledger (ECL) is required based on the information available to him. Second, the justifications for such an exercise of power must be recorded in writing. The language employed in Rule 86-A of the CGST Rules makes it plain that the authority cannot refuse the debit of the decided amount to the ECL or block the ECL even to the extent of the amount found to be fraudulently or erroneously availed of unless both of these pre-requisites are met. The court ordered that, the order blocking the ITC lacked any justification, and there was no evidence that the authority granting the order was satisfied that it was necessary. The assailed ruling would have to be deemed as erroneous in law if the first provision of Rule 86A of the CGST Rules, “having reasons to believe,” was not followed. The second condition, which requires the recording of reasons in writing, is likewise disregarded. As a result, the matter at hand can be classified as an arbitrary exercise of power under Rule 86A of the CGST Rules. To Read Judgement Download PDF Given Below: