ITC blocked solely on directions Central Tax Department: HC declares Instructions of Delhi State Department of Trade & Taxes invalid

The Delhi High Court in the matter of M/S Parity Infotech Solutions Pvt. Ltd. Versus the Government of National Capital Territory of Delhi & Ors. has said that Input Tax Credit (ITC) cannot be blocked solely on the directions Central Tax Department when no material whatsoever was available to come to the conclusion that the petitioner had wrongly availed or utilized the ITC by reason of fraud, wilful-misstatement or suppression of facts to evade tax. Further, the court held that if the Instructions, dated 8-3-2022 of Delhi State Department of Trade & Taxes are understood to mean that a show cause notice be issued mechanically and a demand be created to appropriate the blocked ITC, the same would be contrary to law.

The impugned instructions indicate that the ITC amounting to Rs. 2037.31 crores in respect of 6414 registered taxpayers was blocked by Delhi State GST Officers, and is lying blocked for a period exceeding one year. The said Circular also records that GSTN is contemplating introducing a functionality for automatically unblocking such ITCs in view of Rule 86(3) of the Rules.

The Court also said that the ITC of the taxpayers cannot be blocked beyond a period of one year. To that extent Instructions, dated 8-3-2022 of the Delhi State Department of Trade & Taxes are declared invalid.

Relevant Text:

35. The directive to issue a show cause notice proposing to create a demand by disallowing the ITC and thereafter, creating a demand cannot be read in isolation and in disregard of the provisions of the Act and the Rules. If the impugned instructions are understood to mean that a show cause notice be issued mechanically and a demand be created to appropriate the blocked ITC, the same would be contrary to law. A show cause notice can be issued only if the conditions under Section 74 of the CGST Act are satisfied. In case relating to ITC, the show cause notice can be issued only if the proper officer believes that ITC has been “wrongly availed or utilised by reason of fraud, or any wilful misstatement or suppression of facts to evade tax”. No show cause notice can be issued without the proper officer forming at least a prima facie view that the tax has not been paid or short paid or erroneously refunded or the ITC had been wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts.

36. Concededly, in the present case, respondent no.4 had no particulars as to the transaction in respect of which the ITC was blocked. He had no material whatsoever to come to the conclusion that the petitioner had wrongly availed or utilized the ITC by reason of fraud, wilful-misstatement or suppression of facts to evade tax. The respondents had blocked the petitioner’s ITC solely on the directions issued by the Joint Commissioner, GST West Commissionerate, Central Tax.

37. It is also clear from a plain reading of the impugned instructions that it suggests that the exercise of issuing a show cause notice and creating a demand should be completed before unblocking the ITC notwithstanding that the period of one year has elapsed after the blocking of the ITC. This is contrary to the express provisions of Rule 86A(3) of the Rules. It is apparent that the impugned instructions, to the aforesaid extent, has been issued only to overcome the provisions of Rule 86A(3) of the Rules and the impugned instructions, to this extent, cannot be sustained.

38. In view of the above, the present petition is allowed.

39. The impugned show cause notice and the impugned order are set aside. The impugned instructions, to the extent that it suggests that the ITC of the taxpayers can continue to be blocked beyond a period of one year, is set aside. It is also clarified that the impugned instructions cannot be read to direct issuance of a show cause notice and creation of demands in disregard of the provisions of the DGST Act, the CGST Act or the Rules made thereunder.

40. The respondents are directed to forthwith restore the ITC appropriated pursuant to the demand created by the impugned order, to the ECL of the petitioner.

41. It is clarified that the respondents are not precluded from ascertaining the petitioner’s liability under the DGST Act or the CGST Act in accordance with law. 

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