Rule 86A can’t be invoked without communicating reasons of invoking rule 86A to the assessee

Held by Hon’ble Madras High Court 

in the case M/S. HEC INDIA LLP VERSUS COMMISSIONER OF GST AND CENTRAL EXCISE AUDIT-II, ASSISTANT / DEPUTY COMMISSIONER OF GST & CENTRAL EXCISE, CHENNAI

Vide No.- W.A. No. 2341 of 2021 Dated.- September 16, 2021.

M/s HCE India LLP is registered under GST and ITC of the appellant was blocked by the respondent. The respondent issued a SCN proposing for reversal of ITC on account of mismatch of ITC appearing in GSTR-2A and ITC claimed in GSTR-3B. The appellant furnished the reply to such SCN. The Appellant filed an appeal before Hon’ble High Court contended that ITC blocked by respondent by invoking Rule 86A of CGST Rules is not valid as no order was communicated to the appellant about reasons of invoking Rule 86A.

Hon’ble High Court held that power conferred under Rule 86A is very drastic. Power under Rule 86A should be invoked only if fraudulent ITC or ineligible ITC has been claimed by the assessee and the authority has recorded the reasons for the same in writing. In this matter, Hon’ble High Court relied on precedence of apex court in the matter of GKN Driveshafts (India) Limited Vs. ITO reported in (2003) 259 ITR 19 (SC) wherein it was held that in case of reopening of assessment under Section 143(3) of Income Tax Act,  the assessee should be afforded an opportunity of hearing and he is entitled to know the reasons for reopening and is also entitled to object to such reopening done by the Assessing Officer. Same analogy is applicable in the given case also, the authority is bound to record the reasons of invoking Rule 86A in writing and communicate such reasons to the assessee. On receipt of such reasons, the assessee is entitled to make his submission/objection requesting for lifting.

Therefore, writ appeal made by appellant is allowed and order passed in writ petition is set aside.

1. Brief facts of the case

1. M/S. HEC INDIA LLP (The Appellant) is registered under Goods and Service Tax and the respondent blocked ITC of the appellant to the tune of INR 47,30,457/-.
2. The appellant received a Show Cause Notice from the respondent dated 17th December, 2020 proposing reversal of ITC on account of mismatch between ITC appearing in GSTR-2A and ITC claimed in GSTR-3B.
3. The appellant filed a reply on 12th January, 2021 to the Show Cause Notice. The respondent blocked the ITC of the appellant by invoking provisions of Rule 86A of CGST Rules, 2017. Appellant filed a representation on 22nd June, 2021.
4. The appellant filed a Writ before Hon’ble Madras High Court.
5. The grievance of the Appellant is blocking of ITC availed in the credit ledger of the appellant by invoking Rule 86-A of Central Goods and Services Tax Rules, 2017.

2. Contention of the Appellant 

The Appellant filed following arguments before Hon’ble High Court:

1. The appellant contended that blocking of ITC under Rule 86A was not valid as no order was communicated to the appellant about invoking the power under Rule 86A of CGST Rules, 2017.
2. Hence, the appellant must be permitted to adjust the credit balance available in Electronic Credit Ledger.

3. Contention of the Respondent

The respondent submitted following points before Hon’ble High Court:

1. The respondent submitted that it has issued the show cause notice to the appellant on 17th December, 2020 and response was submitted by the appellant to such SCN on 12th January, 2021.
2. SCN was issued proposing demand for a certain sum for non payment of IGST on Ocean freight charges, wrong availment of Input tax credit etc. 
3. The respondent considered the reply of the appellant and passed the order accordingly.

4. Legal Extracts

Relevant provisions are restated below for ready reference:

1. Rule 86A- Conditions of use of amount available in electronic credit ledger.-

“(1) The Commissioner or an officer authorized 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)…..

(d)…

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.”

5. Analysis of facts and provisions by Hon’ble High Court

Hearing both, Respondent and the Appellant, the Hon’ble court have found out the following as summarised:

1. Rule 86-A confers the power to the commissioner or an officer authorised by him (not below the rank of any Assistant Commissioner), having reasons to believe that ITC available in the Electronic credit ledger has been fraudulently availed or is ineligible, that he may not allow debit of an amount in electronic credit ledger for discharge of any liability or for claim of any refund.
2. However, reasons to believe are to be recorded in writing.
3. Rule 86-A defines various activities in Clause (a) to (d) which would render the assessee ineligible to avail credit.
4. The powers conferred under Rule 86A are very drastic and therefore, rules enumerate the circumstances under which such power can be invoked. All circumstances are related to ITC availed through fraudulent activity or ineligible ITC.
5. Power under Rule 86A should be invoked after considering following points:-
   • Authorities have reasons to believe that the credit in electronic credit ledger has been fraudulently availed or assessee is ineligible to get the credit with regards to clauses (a) to (d) in rule 86-A.
   • The Authority is required to record such reasons.
6. In the given case, the appellant has not been intimated in writing about reasons of invoking Rule 86A.
7. The respondent cannot invoke Rule 86-A without having reasons to believe and without recording such reasons in writing. This is a prerequisite and in the absence any reason, which has been recorded, the invocation Rule 86-A is unauthorised, illegal and without jurisdiction.
8. Communicating the reasons to assessee whill enable him to to put forth his objections and pray for release of the blocking of the electronic credit ledger.
9. In this matter, The Hon’ble court has relied on the Judgement of Hon’ble Supreme Court in the matter of GKN Driveshafts (India) Limited Vs. ITO reported in (2003) 259 ITR 19 (SC),  wherein, apex court held that:
   • The Hon’ble supreme court has laid down a procedure which is required to be followed by Assessing officer dealing cases in which assessments are reopened u/s 143(3) the Income Tax Act, 1961.
   • In that case, the assessee has the right to seek the reasons for reopening and the assessing officer is bound to furnish the same, if sought for.
   • Thereafter, the assessee is entitled to file their objections to the reopening of the assessment and the objections are required to be disposed of by the Assessing Officer by passing a speaking order.
   • The key principles laid down by the Hon’ble Supreme Court is that the assessee should be afforded an opportunity of hearing and he is entitled to know the reasons for reopening and is also entitled to object to such reopening done by the Assessing Officer.

10. Therefore, the same analogy is applicable to the case on hand. 
11. If the authority has reasons to believe that ITC has been fraudulently availed or ineligible ITC has been availed on any of the grounds given in clauses (a) to (d) of Rule 86-A(1), then, the authority may allow not allow debt in Electronic Credit Ledger after recording the reasons.
12. After that the authority is bound to communicate the reasons on which such order is passed.
13. On receipt of such reasons, the assessee is entitled to make his submission/objection requesting for lifting.
14. In the given case, the respondent is bound to consider the representation of the appellant submitted on 22nd June, 2021. The appellant stated in the representation that they have availed credit in accordance with the provisions of the Act and Rule.
15. Since the appellant did not know the reasons for invoking Rule 86A therefore, the representation is only general in nature. Therefore, for an effective representation to be made the Appellant is entitled to know the reasons, based on which the power under Rule 86-A was invoked by the second respondent.

6. Judgement of Hon’ble High Court

The Hon’ble Madras High court has concluding the following in the given case:

1. The writ appeal made by appellant is allowed and order passed in writ petition is set aside.
2. Accordingly, the writ petition is disposed of by directing the respondents to communicate the reasons recorded in writing before invoking the powers under Rule 86-A to the appellant, within a period of one week from the date of receipt of a copy of this order.
3. On receipt of the same, the appellant is entitled to file his objections within a period of three (3) days.  On receipt of the objections, the concerned authorities shall pass an order accordingly.