Facts of the Case

The petitioner, M/s. Sri Krishna Enterprises, represented by its proprietor Mr. Himanshu Joshi, is registered under the Central Goods and Services Tax Act, 2017 and carries on the business of sale and purchase of iron and steel scrap. Alleging that the petitioner had availed irregular Input Tax Credit based on invoices from two suppliers, M/s. Sri Lakshmi Narsimha Traders and M/s. PMS Enterprises, said by the Department to be non-existing firms, the Assistant Commissioner of Central Tax issued a notice dated 07.07.2023. The petitioner responded on 21.07.2023, 26.10.2023 and 27.10.2023 and made further representations. Without any further notice or hearing, the Department blocked the petitioner's Input Tax Credit in the electronic cash ledger on 14.08.2023 under Rule 86A of the CGST Rules, 2017, prompting this writ petition.

Issues Involved

  1. Whether blocking of Input Tax Credit under Rule 86A without a written, reasoned order communicated to the taxpayer is legally sustainable.
  2. Whether the action violated the principles of natural justice given the petitioner's earlier responses to the Department's notice.
  3. Whether the "reasons to believe" requirement under Rule 86A(1) had been complied with by the Department.

Petitioner's Arguments

  • No reasons were assigned or recorded to believe that the invoices were issued by non-existing firms, which Rule 86A mandates.
  • ITC was blocked without any written order being passed or served on the petitioner.
  • The petitioner had already responded to the initial notice and made multiple representations that were never considered before the blocking action.
  • The absence of any show cause notice or personal hearing before blocking amounted to a complete denial of natural justice.

Respondent's Arguments

  • The Department produced certain internal documents relating to the action taken against the petitioner when directed to seek instructions.
  • The records were relied upon to justify that the blocking was based on suspicion of fraudulent credit relating to non-existing supplying firms.

Court Order/Findings

  • On examining the Department's own records, the Court found no specific order blocking the ITC had ever been issued or served on the petitioner, and no further steps were taken after the petitioner's timely responses to the initial notice.
  • Relying on CBIC's Circular dated 02.11.2021 and the Gujarat High Court's ruling in M/S. Nav Nirman Traders vs State Of Gujarat, the Court held that Rule 86A requires an objective "reasons to believe," duly recorded in writing, and that mechanical or unreasoned blocking is impermissible.
  • The absence of any communicated, reasoned order and the failure to grant a hearing rendered the blocking action arbitrary and violative of natural justice.
  • The impugned action was set aside, and the matter was remitted to the Assistant Commissioner to issue a fresh notice of personal hearing and decide the matter afresh on merits within three weeks.
  • The Court also noted the Supreme Court's ruling in State of Karnataka vs M/s Ecom Gill Coffee Trading Private Limited on the taxpayer's burden to prove genuineness of a transaction claiming ITC, leaving that question open for the fresh adjudication rather than deciding it finally.

Important Clarification

Rule 86A action blocking Input Tax Credit cannot be sustained unless the competent officer records objective "reasons to believe" in writing and communicates a proper order to the taxpayer; mere internal notings or an unwritten decision, taken without hearing the taxpayer despite responses already on record, will be struck down as arbitrary, even though the taxpayer still carries the burden of proving genuineness of the underlying transactions at the fresh hearing.

Sections Involved

  • Rule 86A, CGST Rules, 2017 — permits restriction on debiting the electronic credit ledger where credit is believed to be fraudulently availed or ineligible.
  • Section 73, CGST Act, 2017 — governs determination of tax not paid or short paid, contextually relevant to the underlying ITC dispute.
  • Article 226, Constitution of India — invoked for judicial review of the blocking action.

Decision – In Favour of

The decision favours the Assessee. The Court declared the blocking of Input Tax Credit illegal and arbitrary and quashed it, though the matter was remanded for a fresh decision on merits rather than a final adjudication in the petitioner's favour on the underlying credit dispute.

Related Case Laws

No directly on-point case notes are currently published on this site.

Case Details

  • Court: High Court for the State of Telangana at Hyderabad
  • Case No.: WRIT PETITION NO. 31039 of 2023
  • CNR: Not available
  • Coram: Justice P. Sam Koshy and Justice N. Tukaramji
  • Decision Date: 20 November 2023
  • Disposal Nature: Allowed; remanded

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