Case Note & Summary
The petitioner, Ashapura Steel Metal, through its proprietor Velaram Viraji Choudhary, filed a writ petition under Article 226 of the Constitution of India challenging an order dated 10 March 2023 passed by the State Tax Officer, Pune. The impugned order blocked the petitioner's input tax credit (ITC) of Rs. 47,53,041.76 (comprising Rs. 23,76,520.88 under the CGST Act and an equivalent amount under the MGST Act) under Rule 86-A of the CGST/MGST Rules, 2019. The blocking was based on an allegation that the petitioner had fraudulently availed ITC during the periods 2021-22 and 2022-23 from three vendors: Jai Bhavani Trading, Nesa Projects & Logistics LLP, and Salphon Traders. The order stated that there were substantive reasons to believe the credit was fraudulently availed and directed that no debit of an equivalent amount be made from the electronic credit ledger for discharge of liability under Section 49 or for refund. The petitioner contended that the order was passed without any prior notice or opportunity of hearing, violating principles of natural justice. The respondents argued that Rule 86-A does not mandate a prior hearing and that the power is preventive in nature. The court, after hearing both sides, held that the power under Rule 86-A is akin to an attachment before judgment and has serious civil consequences. The court observed that the impugned order did not contain any reasons and was passed without affording the petitioner an opportunity to explain the alleged fraudulent transactions. The court quashed the order and directed the respondents to consider the petitioner's reply and pass a fresh order after hearing the petitioner. The court also clarified that the period of one year mentioned in the order would run from the date of the fresh order if any.
Headnote
A) Constitutional Law - Natural Justice - Prior Hearing - Rule 86-A of the Central Goods and Services Tax Rules, 2017 / Maharashtra Goods and Services Tax Rules, 2017 - The court considered whether an order blocking input tax credit under Rule 86-A could be passed without giving the assessee an opportunity of being heard. The court held that the power under Rule 86-A is akin to an attachment before judgment and cannot be exercised without prior notice and hearing, as it has serious civil consequences. The impugned order was quashed and set aside. (Paras 1-15) B) Goods and Services Tax - Input Tax Credit - Blocking of Credit - Rule 86-A of the CGST Rules, 2017 / MGST Rules, 2017 - The court examined the scope of Rule 86-A and held that the power to block credit is not a summary power but requires a speaking order based on reasons recorded in writing. The court found that the impugned order did not contain any reasons and was passed without hearing the petitioner, thus violating principles of natural justice. (Paras 2-15) C) Goods and Services Tax - Fraudulent Availment of Input Tax Credit - Rule 86-A of the CGST Rules, 2017 / MGST Rules, 2017 - The court noted that the allegation of fraudulent availment of ITC was based on a table of vendors but no opportunity was given to the petitioner to explain. The court held that such an order cannot be sustained without a prior hearing. (Paras 3-15)
Issue of Consideration
Whether the blocking of input tax credit under Rule 86-A of the CGST/MGST Rules without affording a prior hearing to the petitioner is valid in law.
Final Decision
The court quashed and set aside the impugned order dated 10 March 2023. The respondents were directed to consider the petitioner's reply and pass a fresh order after hearing the petitioner. The period of one year mentioned in the order would run from the date of the fresh order if any.
Law Points
- Natural justice
- prior hearing
- Rule 86-A CGST/MGST Rules
- blocking of input tax credit
- Article 226 Constitution of India
- Section 49 CGST Act
