C/SCA/17202/2021 JUDGMENT DATED: 23/02/2022

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

R/SPECIAL CIVIL APPLICATION NO. 17202 of 2021

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR. JUSTICE J.B.PARDIWALA

and

HONOURABLE MS. JUSTICE NISHA M. THAKORE

=============================================

1Whether Reporters of Local Papers may be allowed

to see the judgment ?

2To be referred to the Reporter or not ?

3Whether their Lordships wish to see the fair copy

of the judgment ?

4Whether this case involves a substantial question

of law as to the interpretation of the Constitution

of India or any order made thereunder ?

=============================================

M/S NEW NALBANDH TRADERS

Versus

STATE OF GUJARAT & 2 other(s)

=============================================

Appearance:

MR HARDIK P MODH(5344) for the Petitioner(s) No. 1

for the Respondent(s) No. 2,3

GOVERNMENT PLEADER for the Respondent(s) No. 1,2,3

=============================================

CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA

and

HONOURABLE MS. JUSTICE NISHA M. THAKORE

Date : 23/02/2022

ORAL JUDGMENT

(PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA)

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1.Having regard to the facts of the present litigation and

also considering the present day scenario of the

implementation of the Goods and Services Tax, Act, 2017, the

following observations by the Constitution Bench of the

Supreme Court in the case of Pannalal Binjraj vs. Union of

India, AIR 1957 SC 397 are apt:

“A humane and considerate administration of the relevant

provisions of the Income-tax Act would go a long way in allaying

the apprehensions of the assessees and if that is done in the true

spirit, no assessee will be in a position to charge the Revenue

with administering the provisions of the Act with " an evil eye

and unequal hand ".

1.1All that we need to do is to erase the expression

“provisions of the Income Tax Act” and replace the same with

the expression “provisions of the Goods and Services Tax Act,

2017”.

2.By this writ application under Article 226 of the

Constitution of India, the writ applicant has prayed for the

following reliefs:

“(a) That this Hon'ble Court be pleased to issue a Writ of

Certiorari, or a Writ in the nature of Certiorari, or any other

appropriate Writ, Order or direction, calling for the papers and

proceedings leading to the records relating to blocking of Input

Tax Credit of the Petitioner to the tune of Rs.97,17,290/ (Rupees

Ninety Seven Lakhs Seventeen Thousand Two Hundred and

Ninety Only) and after looking into the same and the legality

thereof, this Hon'ble Court be pleased to quash and set aside the

action of Respondent No.3 regarding blocking of Input Tax Credit

of the Petitioner which has been shown on the login credential of

GSTN portal of the Petitioner (Annexure-E);

(b) That this Hon'ble Court be pleased to issue a Writ of

Mandamus, or a Writ in the nature of Mandamus, or any other

appropriate writ Order or direction to the Respondents to

unblock the Input Tax Credit to the tune of Rs.97,17,290/-

(Rupees Ninety Seven Lakhs Seventeen Thousand Two Hundred

and Ninety Only) of the Petitioner;

(c)for ad-interim relief in terms of prayer (b) above;

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(d)for costs of the petition be provided; and

(e)for such further and other reliefs, as this Hon’ble Court

may deem fit and proper in the facts and circumstances of the

case.”

3.The facts giving to this writ application may be

summarized as under:

3.1The writ applicant is a proprietary concern. It is engaged

in the trading of M.S. Scrap past 13 years. The proprietary firm

purchases the scraps from different suppliers and sale the

same to different entities. In the case on hand, the writ

applicant is said to have purchased M.S. Scrap from one of its

suppliers namely, M/s. Anmol Enterprise during the period

between 22.12.2020 and 27.03.2021.

3.2It is the case of the writ applicant that when it received

the goods from the said supplier, it also received tax invoices,

weighment slips, e-way bills etc. which are the documents

prescribed for the purchase under the provisions of the CGST

Act, 2017. It is also the case of the writ applicant that the

purchase made by it were duly reflected in the Form GSTR –

3B, Form GSTR – 2A and Form GSTR – 2B respectively. It

appears that one day, it came to the notice of the writ

applicant that the respondent no.3 herein had blocked the ITC

in exercise of power under Rule 86A of the Rules to the tune of

Rs.97,17,290/- (Rupees Ninety Seven Lakhs Seventeen

Thousand Two Hundred and Ninety Only) on the purchases

made from M/s. Anmol Enterprise.

3.3It is the case of the writ applicant that he came to know

about such blocking of the ITC through E-mail and SMS on

28.07.2021. Upon receipt of an E-mail and SMS referred to

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above, the writ applicant checked up with the GST portal

wherein it is was displayed that the ITC had been blocked by

the respondent no.3 without assigning any reasons. It is the

case of the writ applicant that he inquired with the respondent

no.3 as to on what basis, the ITC was blocked but, there was

no response at the end of the respondent no.3. In such

circumstances referred to above, the writ applicant is here

before this Court with the present writ application.

4.Mr. Modh, the learned counsel appearing for the writ

applicant would submit that it was expected of the respondent

no.3 to atleast convey the reasons, if not in details atleast in

brief, for blocking the ITC under Rule 86A of the Rules. Mr.

Modh would submit that without any reasons how would a

dealer come to know as to why his ITC has been blocked. He

would submit that all the transactions of his client with M/s.

Anmol Enterprise are clean. If there is any information or

material with the department to doubt the credentials of M/s.

Anmol Enterprise then for such reason alone, the ITC of the

writ applicant could not have been blocked. In other words,

what Mr. Modh is trying to convey is that his client is a bona

fide purchaser of the goods. The goods were delivered in

accordance with law. In such circumstances referred to above,

Mr. Modh prays that there being merit in his writ application,

the same be allowed and the impugned order/action on the

part of the respondent no.3 in blocking the ITC be quashed and

set aside.

5.On the other hand, this writ application has been

vehemently opposed by Mr. Utkarsh Sharma, the learned AGP

appearing for the respondents. Mr. Sharma would submit that

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having regard to the satisfaction arrived at by the authority

based on some information/material, it cannot be said that the

action on the part of the respondent no.3 in blocking the ITC is

illegal. Mr. Sharma, upon the request made by this Court has

made available the satisfaction note dated 28.07.2021. The

English translation of the same reads thus:

“With respect to the Letter No: XIV/001/2017 dated 12/07/2021

of Deputy Commissioner of State Tax (CGST & CE, DIV – I, Surat)

and the Departmental Circular No – 19 dated 06/05/2020, Mr.

Mohmadyusuf Abdulgafar Shaikh's M/s. New Nalbandh Traders

(GSTIN – 24AMMPS4317A1ZA) claimed tax credit of Rs.

97,17,290/- from Mr. Dipakbhai Rathod's M/s. Anmol Enterprise

(GSTIN-24BXMPR0367R1ZN) in December, 2020, January, 2021,

February, 2021, March, 2021 and when CGST investigated at the

main business location of M/s. Anmol Enterprise on 08/07/2021

under Rule – 25 of the CGST with regard to the said letter, no

existence of the tax-payer was found. Thereafter, on conducting

investigation with regard to the GSTRZA register, it appeared

that purchase had been made by M/s. Nalbandh Traders from M/

s. Anmol Enterprise and on checking the GSTN Portal, the GST

number of M/s. Anmol Traders was found suspended. Therefore,

considering the legal provisions under Departmental Circular No

– 19 dated 06/05/2020 and Gujarat Goods and Services Act, 2017

and Rules in the interest of the government revenue, I order to

block the doubtful tax credit of Rs. 97,17,290/- for the purchase

made from M/s Anmol Enterprise.

Sd/-

(Illegible)

- The trader is instructed to prepare the intimation form

DRC-01A.

Sd/-

(Illegible)”

6.Mr. Sharma, also placed before us the intimation in Form

GST – DRC -01A dated 30.07.2021, which reads thus:

“FORM GST DRC-01A

Intimation of tax ascertained as being payable under section 74(5)

[See Rule 142(1A)]

Part A

To,

NEW NALBANDH TRADERS

PLOT NO-14-13, OPP, JAY METAL TECH,

UDHYOGNAGAR UDHNA, ROAD NO-8, 394210

GSTIN-24AMMPS4317AIZA

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Email-anshaikh1977@gmail.com

Sub: Intimation of liability under section 74(5) of

CGST/SGST act.

Please refer to the above proceedings. In this regard, the

amount of tax/interest/ penalty payable by you under section

74(5) with reference to the said case as ascertained by the

undersigned in terms of the available information, as is given

below:

Sr.

No.

Act ITC Wrongly AvailedInterestPenalty

1CGST/SGST 9717290 @24% @15%

The grounds and quantification are given below:

Based on information available with this office your supplier

Anmol Enterprise has not conducted any business from any place

for any period during which registration has been obtained and

found a FAKE/BOGUS UNIT. Therefore, your firm does not

satisfies the conditions u/s 16 of CGST/SGST Act and uses of ITC

under rule 86(A)(1).

You are hereby advised to pay the amount of tax as

ascertained above along with the amount of applicable interest

and penalty under section 74(5) within thirty (30) days failing

which Showcause Notice will be issued under section 74(1).

In case you wish to file any submissions against the above

ascertainment, the same may be furnished within thirty (30)

days in Part B of this form.

Sd/-

Assistant Commissioner of

State Tax,

Unit – 62, Surat.”

7.Mr. Sharma would submit that the inquiry is in progress.

He fairly conceded that although 7 months have elapsed, since

the ITC came to be blocked yet, no show cause notice has

been issued till this date under Section 73 or 74 respectively as

the case may be. He would submit that the object of blocking

the ITC in exercise of power under Rule 86A of the Rules is to

protect the interest of the Revenue. In such circumstances

referred to above, Mr. Sharma prays that there being no merit

in this writ application, the same be rejected.

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8.Having heard the learned counsel appearing for the

parties and having gone through the materials on record, the

only question that falls for our consideration is whether the

respondent no.3 was justified in blocking the ITC under Rule

86A of the Rules.

9.Before adverting to the rival submissions canvased on

either side, we must first look into the provisions of Rule 86A of

the Rules. Section 86A reads thus:

“Notification No.75/2019 – Central Tax New Delhi, the 26

th

December, 2019

G.S.R. 954(E).— In exercise of the powers conferred by section

164 of the Central Goods and Services Tax Act, 2017 (12 of

2017), the Central Government, on the recommendations of the

Council, hereby makes the following rules further to amend the

Central Goods and Services Tax Rules, 2017, namely:-

1. (1) These rules may be called the Central Goods and Services

Tax (Ninth Amendment) Rules, 2019.

(2) Save as otherwise provided, they shall come into force on the

date of their publication in the Official Gazette.

2. In the Central Goods and Services Tax Rules, 2017 (hereinafter

referred to as the said rules), with effect from the 1st January,

2020, in rule 36, in sub-rule (4), for the figures and words “20 per

cent.”, the figures and words “10 per cent.” shall be substituted

3. In the said rules, after rule 86, the following rule shall be

inserted, namely:-

“86A. Conditions of use of amount available in electronic credit

ledger.-

(1) The Commissioner or an officer authorised by him in this

behalf, not below the rank of an Assistant Commissioner, having

reasons to believe that credit of input tax available in the

electronic credit ledger has been fraudulently availed or is

ineligible in as much as

a) the credit of input tax has been availed on the strength of tax

invoices or debit notes or any other document prescribed under

rule 36-

i. issued by a registered person who has been found nonexistent

or not to be conducting any business from any place for which

registration has been obtained; or

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ii. without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax

invoices or debit notes or any other document prescribed under

rule 36 in respect of any supply, the tax charged in respect of

which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been

found non-existent or not to be conducting any business from any

place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in

possession of a tax invoice or debit note or any other document

prescribed under rule 36,

may, for reasons to be recorded in writing, not allow debit of an

amount equivalent to such credit in electronic credit ledger for

discharge of any liability under section 49 or for claim of any

refund of any unutilised amount.

(2) The Commissioner, or the officer authorised by him under

sub-rule (1) may, upon being satisfied that conditions for

disallowing debit of electronic credit ledger as above, no longer

exist, allow such debit.

(3) Such restriction shall cease to have effect after the expiry of a

period of one year from the date of imposing such restriction.”.

4. In the said rules, with effect from the 11th January, 2020, in

rule 138E, after clause (b), the following clause shall be inserted,

namely:-

“(c) being a person other than a person specified in clause (a),

has not furnished the statement of outward supplies for any two

months or quarters, as the case may be.”

10.Having referred to Rule 86A above, we must now look

into Section 16 of the CGST Act. The same reads thus;

“Section 16 - Eligibility and conditions for taking input tax credit

(1) Every registered person shall, subject to such conditions and

restrictions as may be prescribed and in the manner specified in

section 49, be entitled to take credit of input tax charged on any

supply of goods or services or both to him which are used or

intended to be used in the course or furtherance of his business

and the said amount shall be credited to the electronic credit

ledger of such person.

(2) Notwithstanding anything contained in this section, no

registered person shall be entitled to the credit of any input tax in

respect of any supply of goods or services or both to him

unless,––

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(a) he is in possession of a tax invoice or debit note issued by a

supplier registered under this Act, or such other tax paying

documents as may be prescribed;

(b) he has received the goods or services or both.

Explanation.—For the purposes of this clause, it shall be deemed

that the registered person has received the goods or, as the case

may be, services––

(i) where the goods are delivered by the supplier to a

recipient or any other person on the direction of such

registered person, whether acting as an agent or otherwise,

before or during movement of goods, either by way of

transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any

person on the direction of and on account of such registered

person.

(c) subject to the provisions of section 41 or section 43A, the tax

charged in respect of such supply has been actually paid to the

Government, either in cash or through utilisation of input tax

credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39: Provided that

where the goods against an invoice are received in lots or

installments, the registered person shall be entitled to take credit

upon receipt of the last lot or installment:

Provided further that where a recipient fails to pay to the supplier

of goods or services or both, other than the supplies on which tax

is payable on reverse charge basis, the amount towards the value

of supply along with tax payable thereon within a period of one

hundred and eighty days from the date of issue of invoice by the

supplier, an amount equal to the input tax credit availed by the

recipient shall be added to his output tax liability, along with

interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the

credit of input tax on payment made by him of the amount

towards the value of supply of goods or services or both along

with tax payable thereon.

(3) Where the registered person has claimed depreciation on the

tax component of the cost of capital goods and plant and

machinery under the provisions of the Income-tax Act, 1961, the

input tax credit on the said tax component shall not be allowed.

(4) A registered person shall not be entitled to take input tax

credit in respect of any invoice or debit note for supply of goods

or services or both after the due date of furnishing of the return

under section 39 for the month of September following the end of

financial year to which such invoice or invoice relating to such

debit note pertains or furnishing of the relevant annual return,

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whichever is earlier.

"Provided that the registered person shall be entitled to

take input tax credit after the due date of furnishing of the

return under section 39 for the month of September, 2018

till the due date of furnishing of the return under the said

section for the month of March, 2019 in respect of any

invoice or invoice relating to such debit note for supply of

goods or services or both made during the financial year

2017-18, the details of which have been uploaded by the

supplier under sub-section (1) of section 37 till the due date

for furnishing the details under subsection (1) of said

section for the month of March, 2019."

11.Analysis of the Rule 86A:-

A.Supplier found non-existent or not conducting business at

its registered place- It has been availed on the basis of the

documents prescribed under Rule 36 i.e. tax invoice, debit

note etc issued by a registered supplier who has been found

non-existent or not to be conducting any business from any

place for which registration has been obtained.

B. Non receipt of goods or services or both: It has been

availed on the basis of the documents prescribed under Rule

36 i.e. tax invoice, debit note etc without receipt of goods or

services or both.

C. Tax not paid into the Government treasury: It has been

availed on the basis of documents prescribed against which no

tax has been paid into the Government treasury.

D. Recipient found non-existent or not conducting business

at its registered place: It has been availed on the basis of

documents prescribed under Rule 36 i.e. tax invoice, debit

note etc issued by a registered person availing the credit (i.e.

recipient) who has been found non-existent or not to be

conducting any business from any place for which registration

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has been obtained.

E. Availing of credit without documents: The registered

person availing any credit of input tax is not in possession of a

tax invoice or debit note or any other document prescribed

under rule 36.

12.Rule 86A undoubtedly could be said to have conferred

drastic powers upon the proper officers if they have reason to

believe that the activities or invoices are suspicious. The Rule

86A is based on “reason to believe”. “Reason to believe” must

have a rational connection with or relevant bearing on the

formation of the belief. It is a subjective term and can be

interpreted differently by different individuals. Prima facie, it

appears that the Rule 86A does not even contemplate for issue

of any show-cause notice or intimation notice. In such

circumstances, the person affected may be taken by surprise

when he would go to the portal to pay taxes and finds that his

ITC is not usable.

13.This very Bench in one of its recent pronouncements in

the case of Samay Alloys India Pvt. Ltd. Vs. State of Gujarat,

(Special Civil Application No.18059 of 2021) decided on

03.02.2022 had the occasion to consider the scope of Rule 86A

more particularly, in a case wherein the balance in the

electronic credit ledger is NIL. In Samay Alloys India Pvt. Ltd.

(Supra), this Court took the view that the Rule 86A is not the

Rule which entitles the proper Officer to make debit entries in

the electronic credit ledger of the registered person. The Rule

merely allows the proper officer to disallow the registered

person the debit from the electronic credit ledger for the

limited period of time and on a provisional basis. This Court

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took the view that in case the debit entries are made by the

proper Officer, the same would tantamount to permanent

recovery of the input tax credit and the permanent recovery is

governed by the statutory provisions (Sections 73 or 74

respectively of the CGST Act as the case may be) and it would

certainly travels beyond the plain language and the underlined

intent of Rule 86A.

14.Rule 86A has two pre-requisites to be fulfilled before the

power of disallowing of debit of suitable amount to the

Electronic Credit Ledger or blocking of ECL to the extent of the

amount fraudulently or wrongly availed of is exercised. The

first pre-requisite is of the Competent Authority or the

Commissioner having been satisfied on the basis of the

material available before him that blocking of ECL for the

afore-stated reasons is necessary. The second pre-requisite is

of recording the reasons in writing for such an exercise of the

power. From the language used in rule 86-A it becomes very

clear that unless both these pre-requisites are fulfilled, the

authority cannot disallow the debit of the determined amount

to the ECL or cannot block the ECL even to the extent of

amount found to be fraudulently or wrongly availed of.

15.It must be noted that the power under rule 86-A which in

effect is the power to block ECL to the extent stated earlier is

drastic in nature. It creates a disability for the tax payer to

avail of the credit in ECL for discharge of his tax liability, which

he is otherwise entitled to avail. Therefore, all the

requirements of rule 86-A would have to be fully complied with

before the power thereunder is exercised. When this rule

requires arriving at a subjective satisfaction which is evident

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from the use of words, “must have reasons to believe”, the

satisfaction must be reached on the basis of some objective

material available before the authority. It cannot be made on

the flights of one’s fancies or whims or imagination. The power

under rule 86-A is an administrative power with quasi-judicial

hues exhibited in the aforestated twin pre-requisites and has

civil consequences for a tax payer in the sense, it acts as an

obstruction to right of a tax payer to utilise the credit available

in his ECL. Any administrative power having quasi-judicial

shades, which brings civil consequences for a person against

whom it is exercised, must answer the test of reasonableness.

It would mean that the power must be exercised fairly and

reasonably by following the principles of natural justice.

16.In the case of Maneka Gandhi Vs. Union of India : AIR

1978 SC 597 , it was held that the principle of reasonableness

which legally as well as philosophically, is an essential element

of equity or non-arbitrariness and it pervades Article 14 like a

brooding omnipresence and the procedure contemplated by

Article 21 must answer the test of reasonableness in order to

be in conformity with Article 14. Fair and reasonable exercise

of power would be there only when the power is exercised in

the manner prescribed in the provision of law conferring the

power and for the purpose for achievement of which it exists.

This would underline the importance of existence of reasons to

believe that there is fraudulent or erroneous availment of

credit standing in the ECL. In other words, the power under

rule 86-A cannot be exercised unless there is a subjective

satisfaction made on the basis of objective material by the

authority.

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17.As regards the following of principles of natural justice,

the law is now well settled. In cases involving civil

consequences, these principles would be required to be

followed although, the width, amplitude and extent of their

applicability may differ from case to case depending upon the

nature of the power to be exercised and the speed with which

the power is to be used. Usually, it would suppose prior

hearing before it’s exercise (See Swadeshi Cotton Mills Vs.

Union of India : (1981) 1 SCC 664 and Nirma Industries Limited

and another Vs. Securities and Exchange Board of India :

(2013) 8 SCC 20 ). But, it is not necessary that such prior

hearing would be granted in each and every case. Sometimes,

the power may be conferred to meet some urgency and in

such a case expedition would be the hallmark of the power. In

such a case, it would be practically impossible to give prior

notice or prior hearing and here the rule of natural justice

would expect that at least a post decisional hearing or

remedial hearing is granted so that the damage done due to

irrational exercise of power, if any, can be removed before

things get worse. In Smt. Maneka Gandhi (supra), it was laid

down that where there is an emergent situation requiring

immediate action, giving of prior notice or opportunity to be

heard may not be practicable but a full remedial hearing would

have to be granted. The power conferred upon the

Commissioner under rule 86-A is one of such kind. It has civil

consequences though for a limited period not exceeding one

year and has an element of urgency which perhaps explains

why the rule does not expressly speak of any show cause

notice or opportunity of hearing before the ECL is blocked. Of

course, in order to guard against arbitrary exercise of power,

the rule creates certain checks which are found in the twin

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requirements explained by us earlier. But, in our view, that

may not be enough, given the nature of power, and what

settled principles of law tell us in the matter. They would, in

such a case, require this Court to read into the provisions of

rule 86-A something not expressly stated therein, and so, we

find that post decisional or remedial hearing would have to be

granted to the person affected by blocking of his ECL. We may

add that such post decisional hearing may be granted within a

reasonable period of time which may not be beyond two weeks

from the date of the order blocking the ECL. After such hearing

is granted, the authority may proceed to confirm the order for

such period as may be permissible under the rule or revoke the

order, as the case may be.

18.The second pre-requisite of rule 86-A is of recording of

reasons in writing. It comes with the use of the word “may”,

which, in our opinion, needs to be construed as conveying an

imperative command of the rule maker, and that means,

reasons must be recorded in writing in each and every case.

This is because of the fact that any order which brings to bear

adverse consequences upon the person against whom the

order is passed, must disclose the reasons for it so that the

person affected thereby would know why he is being made to

suffer or otherwise he would not be able to seek appropriate

redressal of his grievance arising from such an order. Right to

know the reasons behind an administrative order having civil

consequences is a well embedded principle forming part of

doctrine of fair play which runs like a thread through the warp

and weft of the fabric of our Constitutional order made up by

Articles 14 and 21 of the Constitution of India. In the case of

Andhra Bank V/s. Official Liquidator : (2005) 3 SCJ 762 , the

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Apex Court has held that an unreasoned order does not

subserve the doctrine of fair play. It then follows that the word,

“may” used before the words, “for the reasons recorded in

writing” signifies nothing but a mandatory duty of the

competent authority to record reasons in writing.

19.There is another reason which we would like to state here

to support our conclusion just made. The power under rule 86-

A is of enabling kind and it is conferred upon the Commissioner

for public benefit and, therefore, it is in the nature of a public

duty. Essential attribute of a public duty is that it is exercised

only when the circumstances so demand and not when they do

not justify its performance (see Commissioner of Police,

Bombay Vs. Gordhandas Bhanji : AIR (39) 1952 Supreme Court

16). It would then mean that justification for exercise of the

power has to be found by the authority by making a subjective

satisfaction on the basis of objective material and such

satisfaction must be reflected in the reasons recorded in

writing while exercising the power. (Vide: Dee Vee Projects Ltd.

v/s. Union of India & Ors., Writ Petition No.2693/2021, dated

11.02.2022 (Bombay High Court)).

20.Examined in the light of above principles of law, the

provisions made in rule 86-A would require the Competent

Authority to first satisfy itself, on the basis of objective

material, that there are reasons to believe that credit of input

tax available in ECL has been fraudulently or wrongly utilised

and secondly to record these reasons in writing before the

order of disallowing debit of requisite amount to the ECL or

requisite refund of unutilised credit, is passed or otherwise the

order of blocking the ECL under rule 86-A would be

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C/SCA/17202/2021 JUDGMENT DATED: 23/02/2022

unsustainable in the eye of law.

21.We now proceed to look into the so called impugned

order. The impugned order reads thus:

“Some amount of ITC available in the Electronic Credit Ledger of

GSTIN 24AMMPS4317A1ZA has been blocked/unblocked by

Shri/Mr/Ms SHIVAM SHAILESHKUMAR JANI, Assistant Commissioner,

Ghatak 62 (Surat), Admn.:- STATE. Please view the details in the said

ledger on the portal.GSTN”

22.The details of the electronic credit ledger reads thus:

“Blocked by Shri/Mr/Ms SHIVAM SHAILESHKUMAR JANI, Assistant

Commissioner, Ghatak 62 (Surat), Admn. STATE.”

Viewing Electronic Credit ledger details from 21/07/2021 to

01/09/2021

Sr.

No

Date Referenc

e No.

Tax

Period,

if any

Descriptio

n

Transact

ion Type

(Debit/Cr

edit)

Credit/Debit (Rs.)

Integrat

ed tax

(Rs.)

Central

tax

State TaxCessTotal

1 - - - Opening

Balance

- - - - - -

228/07/2021BL24072

1000015

4

Jul-21BlockedDebit1.0048,58,644

.00

48,58,645

.00

0.0097,17,290

3 - - - Closing

Balance

- - - - - -

23.The aforesaid order is bereft of any reasons and

therefore, there is no question of any reflection therein of the

authority passing the order on being satisfied about the

necessity of passing it. When the first requirement of Rule 86A

is of, “having reasons to believe” and it has manifestly been

not followed, the impugned order would have to be treated as

erroneous in law. The second requirement regarding recording

of reasons in writing is also followed in breach. In such

circumstances, it can be said that the case on hand is one of

an arbitrary exercise of power under Rule 86A.

24.Before we close this judgment, we must observe

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something as regards Section 43A of the Act, 2018.

24.1Rule 86A may subject a bona fide assessee to undue

hardship by the blockage of his credit ledger due to the default

of his supplier. This may tantamount to equating the default of

the recipient with that of the supplier. Section 43A was

inserted into the Act vide the CGST (Amendment) Act, 2018.

Section 43A(6) provides that the supplier and the recipient of a

supply shall be jointly and severally liable to pay tax, or to pay

the input tax credit availed, as the case may be, in relation to

the outward supplies.

24.2However, section 43A has not been notified yet.

Therefore, the same does not apply. In the absence of section

43A being notified, this power has not been contemplated by

the Act. Further, the notification of rule 86A prior to the section

43A is indicative of the fact that the rule did not intend to draw

the validity from section 43A. Thus, the blocking of a

recipient’s credit ledger on the account of default of a supplier,

vide rule 86A, is wanting of statutory authority at present.

24.3On the perusal of the aforesaid provisions, it can be said

that there is a specific mechanism for reversing the credit in

the case of a discrepancy in the ITC availed by the recipient,

against the output liability of the supplier. However, the ITC

reversal mechanism, as laid down in section 41 read with

Rules, is kept in abeyance. The facility to furnish GSTR – 2 and

GSTR – 3 Forms is also not available. Accordingly, there is no

system-based matching of the ITC being carried out presently,

and till the time such provisions are given effect, the recipients

shall be eligible to claim ITC provisionally on the basis of the

invoice issued by customer.

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24.4It has been held in a catena of judgments that a bona

fide recipient should be made to suffer on account of a

supplier’s default. In Quest Merchandising India Pvt. Ltd. v.

Govt. of NCT of Delhi, W.P. (C) 6093 of 2017 dated 26.10.2017

(Delhi High Court), the assessee had duly paid the tax to the

supplier, but the supplier had not deposited the tax with the

Government. The assessee argued that the purchasing dealer

can check on the web portal of the department if the selling

dealer is a fictitious person or a person whose registration

stands cancelled. The Court held that the purchasing dealer

was being asked to do the impossible, i.e. to anticipate the

selling dealer who will not deposit the tax collected by him

from such purchasing dealers to the Government, and

therefore avoid transacting with such selling dealers. The Delhi

High Court read down the concerned provision to not include a

buyer who has bona fide entered into the purchase

transactions with validly registered dealers who have issued

the tax invoices against the transaction. The Court explained

that such provision, if not read down, is violative of Article 14

of the Constitution for being inherently arbitrary. The only case

when such provision applies is if the tax authorities come

across some material to show that the purchasing dealer and

the selling dealer, acted in collusion in detriment to the

exchequer. However, in the event that the selling dealer has

failed to deposit the tax collected, the remedy for the

authorities is to proceed against the defaulting selling dealer to

recover such tax and not to deny the purchasing dealer his

input. The Supreme Court affirmed the said case and

dismissed the Revenue’s petition seeking special leave to

appeal against this decision.

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24.5In Sri Vinayaga Agencies v. Assistant Commissioner, W.P.

Nos. 2036 to 2038 of 2013, dated 29.01.2013 (Madras High

Court), the Madras High Court held that law does not empower

the tax authorities to reverse the ITC availed, on a plea that

the selling dealer has not deposited the tax. It can revoke the

input credit only if it relates to the incorrect, incomplete or

improper claim of such credit.

24.6The need for the law to distinguish between honest and

dishonest dealers was acknowledged by the Punjab and

Haryana High Court in Gheru Lal Bal Chand v. State of

Haryana, Civil Writ Petition No.6573 of 2007, decided on

23.09.2011 where the constitutional validity of Section 8 of the

Haryana DVAT Act, 2003 (‘HVAT Act') was being considered. It

was held that:

"In legal jurisprudence, the liability can be fastened on a person

who either acts fraudulently or has been a party to the collusion

or connivance with the offender. However, law nowhere

envisages imposing any penalty either directly or vicariously

where a person is not connected with any such event or an act.

Law cannot envisage an almost impossible eventuality. The onus

upon the assessee gets discharged on production of Form VAT C-

4 which is required to be genuine and not thereafter to

substantiate its truthfulness by running from pillar to post to

collect the material for its authenticity. In the absence of any

malafide intention, connivance or wrongful association of the

assessee with the selling dealer or any dealer earlier thereto, no

liability can be imposed on the principle of vicarious liability. Law

cannot put such onerous responsibility on the assessee

otherwise, it would be difficult to hold the law to be valid on the

touchstone of Articles 14 and 19 of the Constitution of India. The

rule of interpretation requires that such meaning should be

assigned to the provision which would make the provision of the

Act effective and advance the purpose of the Act. This should be

done wherever possible without doing any violence to the

language of the provision. A statute has to be read in such a

manner so as to do justice to the parties. If it is held that the

person who does not deposit or is required to deposit the tax

would be put in an advantageous position and whereas the

person who has paid the tax would be worse, the interpretation

would give result to an absurdity. Such a construction has to be

avoided.

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In other words, the genuineness of the certificate and declaration

may be examined by the taxing authority, but onus cannot be put

on the assessee to establish the correctness or the truthfulness of

the statements recorded therein. The authorities can examine

whether the Form VAT C-4 was bogus and was procured by the

dealer in collusion with the selling dealer. The department is

required to allow the claim once proper declaration is furnished

and in the event of its falsity, the department can proceed

against the defaulter when the genuineness of the declaration is

not in question. However, an exception is carved out in. The

event where fraud, collusion or connivance is established

between the registered purchasing dealers or the immediate

preceding selling registered dealer or any of the predecessors

selling registered dealer, the benefit contained in Form VAT C-4

would not be available to the registered purchasing dealer. The

aforesaid interpretation would result in achieving the purpose of

the rule which is to make the object of the provisions of the Act

workable, i.e., realization of tax by the revenue by legitimate

methods."

25.In the result, this writ application succeed in part and is

partly allowed accordingly. The impugned order of blocking of

the ECL of the writ applicant is hereby quashed and set aside.

The respondents are at liberty to pass a fresh order under Rule

86A of the Central Goods and Service Tax Rules, 2017 in

accordance with law and in the light of the observations made

hereinabove.

(J. B. PARDIWALA, J)

(NISHA M. THAKORE,J)

NEHA

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