New Delhi, February 13
Bombay High Court has held that adequate emphasis should be on not only ‘having reasons to believe’ to block Input Tax Credit (ITC) but also on ‘recording of the reasons’. Also, it said that blocked amount should not be more than the amount involved in fraud.
Experts say this is very a important ruling as it brings clarity on many issues related with applicability of Section 86 A of the Central Goods & Services Tax (CGST) Rules, 2017. This particular rule enables tax official to not allow utilisation of the amount of credit available in Electronic Credit Ledger (ECL) for discharge of any liability for the payment of tax, interest, penalty and other amounts under or to refuse the request for refund of any unutilised credit in ECL.
The petitioner, Dee Vee Projects Limited, moved to court with four questions – whether blocking of ECL amounts to provisional attachment of property, blocking to what extent, whether the order of blocking is arbitrary and illegal and are tax authorities justified in blocking the ECL. After going through all the arguments, the division bench said blocking of ECL is not at par with provisional attachment of property.
In response to the second question, the bench said that the rule 86 A does permit dis-allowance of debit of an amount to the electronic credit ledger only to the extent of fraudulent or wrong availment of credit in the ECL.
According to the bench, 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 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 ones fancies or whims or imagination, it observed.
Further, it mentioned that based on the rules, tax official need to first satisfy himself, 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 is passed otherwise the order of blocking the ECL under rule 86 A would be unsustainable in the eye of law, it said and on this ground the order was quashed.
However, the bench said that tax authority can issue fresh order under the rule but keeping the observations made here.
‘Landmark ruling’
Harpreet Singh, Partner, KPMG in India says the order could be viewed as landmark ruling on three counts. Firstly, the High Court has provided adequate emphasis on not only ‘having reasons to believe’ to block credit but also on ‘recording of the reasons’. Secondly, it has been held that amount of credit to be blocked cannot be more than the alleged amount of fraudulent availment. “Lastly, but most importantly, the Court has held that while there is subjectivity provided to authorities for blocking credit, the same ought to be on the basis of Objective material,” he said.