Facts of the Case

The petitioner, a proprietary concern trading in M.S. Scrap for over 13 years, purchased scrap from its supplier, M/s. Anmol Enterprise, between 22.12.2020 and 27.03.2021, against tax invoices, weighment slips and e-way bills, with the purchases reflected in Forms GSTR-3B, GSTR-2A and GSTR-2B. On 28.07.2021, the petitioner learnt through an SMS/e-mail that the respondent no.3 had blocked its input tax credit of Rs.97,17,290 under Rule 86A of the CGST Rules, 2017 on purchases made from Anmol Enterprise, whose GST registration was found suspended and whose place of business could not be verified during a departmental inspection under Rule 25. No reasons were communicated to the petitioner at the time of blocking; a Form GST DRC-01A intimation citing Section 74(5) followed only on 30.07.2021. Seven months later, no show-cause notice under Section 73 or 74 had been issued. The petitioner challenged the blocking order before the Gujarat High Court.

Issues Involved

  1. Whether the respondent authority was justified in blocking the petitioner's electronic credit ledger under Rule 86A of the CGST Rules, 2017 without recording reasons and without prior or post decisional hearing.
  2. Whether default or non-existence of the supplier alone can justify blocking a bona fide recipient's input tax credit in the absence of collusion.

Petitioner's Arguments

  • The department was bound, at the least, to convey reasons for blocking the ITC; without reasons, a dealer has no way of knowing why the credit was blocked.
  • All transactions with Anmol Enterprise were genuine and supported by tax invoices, weighment slips and e-way bills, and the petitioner was a bona fide purchaser.
  • Any doubt about the supplier's credentials could not, without more, justify blocking the bona fide recipient's own credit.

Respondent's Arguments

  • The blocking action was based on a satisfaction note recording that the supplier, Anmol Enterprise, was found non-existent at its registered place of business upon inspection, and its registration stood suspended.
  • The action was taken in the interest of revenue under Rule 86A, and though the inquiry was still in progress, the object of the provision was to protect the exchequer pending verification.

Court Order / Findings

  • The Court held that Rule 86A has two mandatory pre-requisites — subjective satisfaction based on objective material that credit was fraudulently or wrongly availed, and reasons recorded in writing before blocking; the word "may" before "reasons... recorded in writing" was read as an imperative duty, not a discretion, since an unreasoned order with civil consequences violates fair play under Articles 14 and 21.
  • As Rule 86A does not contemplate a prior show-cause notice, the Court held a post-decisional or remedial hearing must be granted within two weeks of blocking, after which the authority may confirm or revoke it.
  • The impugned order merely recorded that ITC had been "blocked/unblocked" with no reasons at all, and was therefore held an arbitrary exercise of power under Rule 86A; it was quashed, with liberty to the department to pass a fresh, reasoned order.
  • The Court also observed that Section 43A (joint liability of supplier and recipient), not having been notified, cannot presently justify blocking a recipient's credit merely for the supplier's default.

Important Clarification

  • Blocking the electronic credit ledger under Rule 86A is a drastic, quasi-judicial power; both pre-requisites — objective-material-based satisfaction and written reasons — must be strictly met, and a bare "blocked" portal entry without reasons is legally unsustainable.
  • Natural justice requires a post-decisional hearing within a reasonable period, not exceeding two weeks from blocking. Absent notification of Section 43A, a bona fide recipient's credit cannot be blocked merely because the supplier later defaults, unless collusion is shown.

Sections Involved

  • Rule 86A, Central Goods and Services Tax Rules, 2017 — empowers the Commissioner to disallow debit of the electronic credit ledger where credit is believed to be fraudulently or wrongly availed.
  • Section 16, Central Goods and Services Tax Act, 2017 — lays down eligibility conditions for availing input tax credit.
  • Section 43A, Central Goods and Services Tax Act, 2017 — provides for joint and several liability of supplier and recipient (not yet notified).
  • Sections 73/74, Central Goods and Services Tax Act, 2017 — govern recovery proceedings for wrongly availed input tax credit.

Decision – In Favour of

Decided in favour of the Assessee; the Rule 86A blocking order was quashed for want of recorded reasons, though the department was left at liberty to pass a fresh, reasoned order in accordance with law.

Related Case Laws

The Court relied on its own ruling in Samay Alloys India Pvt. Ltd. vs. State of Gujarat (SCA No.18059 of 2021, decided 03.02.2022) on the limited scope of Rule 86A, and on Quest Merchandising India Pvt. Ltd. vs. Govt. of NCT of Delhi (Delhi HC) and Gheru Lal Bal Chand vs. State of Haryana (P&H HC) protecting bona fide recipients from a defaulting supplier's lapses. This is a leading Rule 86A precedent frequently cited in later Gujarat High Court rulings covered on this site.

Case Details

  • Court: High Court of Gujarat at Ahmedabad
  • Case No.: R/SPECIAL CIVIL APPLICATION NO. 17202 of 2021
  • Coram: Hon'ble Mr. Justice J.B. Pardiwala and Hon'ble Ms. Justice Nisha M. Thakore
  • Date: 23.02.2022
  • Petitioner: M/s New Nalbandh Traders
  • Respondents: State of Gujarat & 2 others

Link to Download the Order

https://mytaxexpert.co.in/uploads/1787108749_4693compressed.pdf

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