The Madras High Court has refused to refund the amount due to serious allegations of obtaining fraudulent GST ITC in the electronic credit ledger

In the case of M/s. MNS Enterprises Versus The Additional Director General Directorate of GST Intelligence, a Madras High Court bench led by Justice C. Saravanan refused to grant a refund of the amount lying in the assessee’s electronic cash ledger; on the basis of serious allegations against the assessee for having an availed fraudulent input tax credit (ITC) in the electronic credit ledger on the strength of a bogus and fictitious input tax invoice for discharging GST liability with no supply.

Under Chapter IX of the CGST Rules, 2017, the writ petitioner/assessee has requested a return of Rs.88,17,754 held in the petitioner’s electronic ledger. The petitioner’s computerized ledger was frozen, and the petitioner was unable to spend the funds.

The issue at hand was whether the petitioner could get a mandamus order requiring the repayment of funds held in his computerized cash ledger.

Sheik Dawood, the petitioner’s proprietor, had been served with a summons by the respondent. The proprietor was apprehended and taken into custody by the authorities. Statements were obtained from the petitioner’s proprietor, and during questioning, a letter was extracted from the petitioner’s proprietor in which the petitioner requested that one of the customers, Nobal Tech Industries Pvt. Ltd., remit amounts due to the petitioner as outstanding to be paid directly into the petitioner’s GSTN Account.

Counsel for the petitioner claimed that the letter was obtained under duress and that the sums in the petitioner’s electronic ledger had impeded the petitioner’s day-to-day business by causing a liquidity crunch, leaving the petitioner unable to pay suppliers or pay salaries to staff.

The department has effectively crippled the petitioner’s business by forcing the customer to directly remit the amount into the petitioner’s GSTN account without issuing a Show Cause Notice, according to counsel for the petitioner. The department has also placed the petitioner’s proprietor under judicial custody for a period of two months, in violation of the CGST Act’s safeguards.

Counsel for the petitioner argued that if the law requires something to be done a certain way, it must be done that way. The recovery process established by Section 11 of the Central Excise Act, 1944, Section 87 of the Finance Act, 1994, and Chapter V of the Finance Act, 1994 is comparable to Section 79 of the CGST Act. Under the CGST Act, the Department should first conduct a comprehensive investigation before issuing an appropriate show cause notice under Sections 73 and 74 of the CGST Act, 2017 and adjudicating in the manner stipulated by the CGST Act.

The collection of tax can only be done in the legal manner, and so the amount being recovered as tax would be in violation of Article 265 of the Indian Constitution.

Counsel for the department, on the other hand, claimed that the department discovered a fraud of approximately Rs. 11.80 crores committed by the petitioner on the basis of fictitious invoices to discharge the tax liability, and that the amount lying in the GSTN account for a sum of Rs. 88,17,754 was only 7% of the estimated tax liability of Rs. 11.80 crores.

The court cited the Supreme Court’s decision in the case of State of Uttar Pradesh Vs. Singhara Singh and Others, which declared that when the law requires something to be done in a certain way, it must be done in that way. As a result, the sum that the petitioner’s customer or client has paid into the petitioner’s Electronic Liability Register cannot be ordered to be reimbursed directly. The deposit into the petitioner’s electronic cash ledger can be made not only by the petitioner, but also by anybody else on his or her behalf. A reading of Section 49 of the CGST Act, 2017 in conjunction with Rule 86 of the CGST Rules, 2017 reveals this.

“If the money was coerced into being paid into the petitioner’s Electronic Liability Register by receiving a letter from the petitioner, it may be a clever way of creating a liquidity crisis to guarantee that such a sum is not wasted. As previously stated, the issue of whether the payment was paid under duress or not cannot be decided in this short proceeding. It is the petitioner’s responsibility to determine the legal remedy for refund of the sum under Section 54 of the CGST Act, 2017 and Chapter X of the CGST Rules, 2017 “ The court took notice.

The court stated that the amount in the Electronic Liability Register can be used by the petitioner to discharge tax liability against future supplies made by the petitioner, provided that the tax to be paid by the petitioner is adjudicated, determined, and appropriated in the proposed proceedings under Section 73 or 74 of the CGST Act, 2017, in which case Section 79 of the CGST Act, 2017 can be pressed into service.

“There is no basis for giving any relief to the petitioner in this writ case because the amount has not been debited and has not yet been appropriated. As a result, I do not believe the current Writ Petition has any merit. As a result, the current Writ Petition may be dismissed. However, under Section 54 of the CGST Act and Chapter X of the CGST Rules, I grant the petitioner the freedom to devise an adequate remedy.”

The court has ordered the respondent to serve the petitioner with a suitable show cause notice, preferably within three months.

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