Case Note & Summary
The appeals arose from a common order dated 27.07.2023 passed by a Single Judge in a batch of writ petitions, rejecting the contentions of the appellants and issuing directions. The appellants, registered under GST dealing in lead and lead scrap, had availed input tax credit (ITC) on purchases from registered dealers. By orders dated 27.06.2023, the respondent revenue authorities blocked the appellants' Electronic Credit Ledgers (ECL) invoking Rule 86A of the Central Goods and Services Tax Rules, 2017, alleging fraudulent or ineligible ITC. The appellants challenged these blocking orders in writ petitions, which were disposed of by the Single Judge. Aggrieved, the appellants filed intra-court appeals under Section 4 of the Karnataka High Court Act, 1961. The amicus curiae argued that Rule 86A requires a pre-decisional hearing and that post-decisional hearing is no substitute; the power under Rule 86A is drastic and requires existence of "reasons to believe" based on application of mind; orders cannot be passed merely on investigation reports; a bonafide purchaser cannot be denied ITC due to supplier's default; and blocking of ECL causes irreparable injury and violates the purpose of value-added taxation. The respondents supported the impugned order. The Division Bench heard the appeals on 05.09.2023 and reserved judgment, which was pronounced on 02.04.2024. The full decision is not contained in the provided excerpt.
Issue of Consideration
Whether the invocation of Rule 86A of CGST Rules to block electronic credit ledgers without pre-decisional hearing and without proper application of mind is valid, and whether a bonafide purchaser can be denied input tax credit on account of supplier's alleged fraudulent availment
Law Points
- Rule 86A of CGST Rules requires pre-decisional hearing
- reasons to believe must be based on material
- blocking of input tax credit for bonafide purchaser cannot be based solely on supplier's default
- orders blocking electronic credit ledger must comply with CBEC Circular dated 02.11.2021
Case Details
2024 LawText (KAR) (04) 13
WA No. 100425 of 2023 c/w WA No. 100426 of 2023, WA No. 100427 of 2023, WA No. 100428 of 2023, WA No. 100429 of 2023, WA No. 100430 of 2023
S.R. Krishna Kumar, G. Basavaraja
V. Raghuraman (Senior Counsel and Amicus Curiae), Santosh Pujari for appellants; Malhar Rao (Addl. Advocate General), Shivaprabhu Hiremath (Addl. Govt. Advocate) for respondents
K-9-Enterprises represented by Nadeem Zafrulla Khan; K-9-Industries represented by Mohammed Jaffar Sadiq; Kwality Metals represented by Nadeem Nazirahmed Latif
The State of Karnataka and The Assistant Commissioner of Commercial Taxes, LGSTO-395 Belagavi and Nodal Officer DGSTO, Belagavi
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Nature of Litigation
Intra-court appeals against the order of a Single Judge upholding the blocking of Electronic Credit Ledgers under Rule 86A of CGST Rules.
Remedy Sought
Appellants seek setting aside the impugned common order and allowing the writ petitions.
Filing Reason
The appellants challenge the blocking of their Electronic Credit Ledgers as being contrary to Rule 86A and principles of natural justice.
Previous Decisions
The writ petitions were disposed of by the Single Judge rejecting the appellants' contentions and issuing certain directions.
Issues
Whether the invocation of Rule 86A of CGST Rules requires a pre-decisional hearing and application of mind to satisfy 'reasons to believe'?
Whether the blocking of input tax credit violates the rights of a bonafide purchaser when the supplier's default is alleged?
Whether the impugned orders of blocking electronic credit ledgers comply with the conditions and procedure under Rule 86A and the CBEC circular?
Submissions/Arguments
Appellants argued that Rule 86A requires pre-decisional hearing; post-decisional hearing is not a substitute; power under Rule 86A is drastic and requires 'reasons to believe' based on application of mind; orders cannot be passed merely on investigation reports; bonafide purchaser cannot be denied ITC due to supplier's default; blocking causes irreparable injury and violates VAT principles; impugned orders are contrary to CBEC Circular dated 02.11.2021.
Respondents supported the impugned order and submitted that the appeals lacked merit and were liable to be dismissed.
Judgment Excerpts
By the orders dated 27.06.2023 impugned in the instant writ petitions, the ECL of the appellants were blocked by the respondents by invoking Rule 86A of the Central Goods and Services Tax Rules, 2017 (Para 2).
It was submitted that prior to invoking Rule 86A and blocking the ECL, a pre-decisional hearing was required and post-decisional hearing is not a substitute and can be resorted to only if the pre-decisional hearing brooks delay (Para 6(i)).
It was also submitted that the power conferred upon the proper officers under Rule 86A was drastic and draconian in nature warranting existence of “reasons to believe” before exercising the said power by strictly complying with all the conditions / requirements of the said provision (Para 6(ii)).
Procedural History
The writ petitioners filed W.P.No.104242/2023 and connected matters challenging the blocking of their Electronic Credit Ledgers under orders dated 27.06.2023. The Single Judge by common order dated 27.07.2023 rejected the contentions and issued directions. The aggrieved petitioners filed the present intra-court appeals under Section 4 of the Karnataka High Court Act, 1961. The appeals were heard by a Division Bench on 05.09.2023 and judgment reserved. Judgment pronounced on 02.04.2024.
Acts & Sections
- Central Goods and Services Tax Rules, 2017: Rule 86A
- Karnataka High Court Act, 1961: Section 4
