Commissioner Not Empowered To Block ECL By Amount Exceeding Credit Available: Delhi High Court

The Delhi High Court has held that the commissioner is not empowered to block ECL E(lectronic Credit Ledger) by amount exceeding credit available.

In a bunch of 8 petitions defended by the State & Central GST, Delhi High Court sets aside to the extent the orders that disallow debit from the respective Electronic Credit Ledger (ECL) of assessees in excess of the Input Tax Credit (ITC) available in the ECL.

The bench of Justice Vibhu Bakhru and Justice Sachin Datta has observed that Rule 86A of the GST Rules is not a machinery provision for recovery of tax or dues under the CGST Act. It is not a part of the scheme of the machinery provisions for assessment and determination of the tax and dues as payable under the CGST Act. It is an emergent measure for protection of revenue by temporarily not allowing debit of available ITC in the ECL, which the Commissioner or an officer authorised by him has reasons to believe has been wrongfully availed.

The bench noted that the Rule 86A of the CGST Rules does not permit the Commissioner or an officer authorised by him, to block a taxpayer’s Electronic Credit Ledger (ECL) by an amount exceeding the credit available at the time of issuance of the order. 

Background 

The petitioners/assessee are taxpayers and are registered under the Central Goods and Services Tax Act, 2017. The the petitioners have challenged the orders passed by the Commissioner/officer authorised by Commissioner, under Rule 86A of the Central Goods and Services Tax Rules, 2017to the extent that the orders purport to block the input tax credit in their respective Electronic Credit Ledgers in excess of the credit available in their respective ECLs. It creates an artificial negative balance in the ECL. 

Resultantly, till the negative balance in the ECL of the respective petitioners is not extinguished by further addition (credit) of ITC in the ECL, the petitioners are disabled to utilize the ITC availed by them for payment of their dues. Thus, in effect, only the ITC remaining after adjusting the negative balance, would be available to the taxpayer for discharging its dues.

The petitioners submitted that Rule 86A of the Rules does not permit blocking of the ITC, which is unavailable in a taxpayer’s ECL. They claim that on a plain reading of Rule 86A of the Rules, the power of the competent officer to block the ITC of a taxpayer is confined to the ITC that is available at the material time in the taxpayer’s ECL. 

As per the department, the Commissioner / authorized officer has the power to not allow the debit of an amount equivalent to the ITC, which he has reason to believe was fraudulently availed or is ineligible. The amount is not confined to the credit balance of the ITC as available on the date of the order under Rule 86A of the GST Rules. 

The amount of ITC that can be blocked may exceed the credit balance of ITC as available in the ECL on the date of the order and the taxpayer would not be permitted to utilise the ITC for discharge of its dues or to seek a refund, till the full amount, which is alleged to have been fraudulently availed is blocked. The taxpayer can, thus, use or seek refund of the ITC, which is in excess of the amount, which the Commissioner or the authorised officer has reasons to believe is fraudulently availed or is inadmissible.

Issue Raised 

The assessees raised the issue whether Rule 86A of the GST Rules permits the Commissioner or an officer authorized by him, to block a taxpayer’s ECL by an amount exceeding the credit available at the time of issuance of the said order?

Arguments

The assessee contended that a taxpayer has a vested right in utilising the ITC as available in his ECL for discharge of its dues or in appropriate cases for seeking a refund of the same. Thus, the same could not be blocked or appropriated except by a specific statutory provision to the said effect. Rule 86A of the Rules is required to be strictly interpreted and a taxpayer’s ECL can be blocked only to the extent as permitted under Rule 86A of the Rules.

The assessee stated that the provision is unambiguous and therefore, is required to be interpreted by applying the Rule of literal interpretation. 

The assessee relied on the decision of decisions of the Calcutta High Court in Basanta Kumar Shaw v. Assistant Commissioner of Revenue, Commercial Taxes and State Tax, Tamluk Charge & Ors. where the Court had taken a contrary view. He submitted that the Calcutta High Court had interpreted the provisions of Rule 86A of the Rules by applying the rule of purposive construction to give effect to the legislative intent.

The legislative intent was clearly to exclude a taxpayer from utilising ITC to the extent that it was inadmissible or was fraudulently availed. Interpreting Rule 86A of the Rules, bearing in mind the said objective, would clearly indicate that the Rule enables the Commissioner or an officer authorised by him to block the ITC equivalent to the amount of the ITC which is fraudulently availed or was ineligible. There is no express provision that limits the scope of power under Rule 86A of the Rules, to block only the credit balance as available on the date of the issuance of the order.

The department contended that the statute must be construed according to the intent of the legislature. The intent of framing Rule 86A of the Rules was clearly to deprive the taxpayer of availing the ITC to the extent that such ITC was availed fraudulently or was ineligible. The power to block the ITC is confined to a sum equivalent to the ineligible and fraudulently availed ITC.

The department contended Rule 86A of the Rules is akin to ‘a no debit’ provision. It does not allow debit of the ECL to the extent of fraudulently availed or ineligible credit. Rule 86A of the Rules cannot be construed as a provision for recovery of tax. It is merely a temporary measure of not permitting the taxpayer to use the ITC for discharge of its dues or to seek a refund of the same. This is the least invasive method adopted to protect the department. The expression “available” as occurring in the opening part of Rule 86A of the Rules would include the ITC, which had been passed on or was utilised. 

The department that the words, “has been fraudulently availed”, reinforces the said interpretation. It could also be construed to include tax credit that was available in the ECL. In such cases, invocation of Rule 86A of the Rules impedes the use of tainted credit. It is also possible that the balance available in ECL is partly tainted. However, since it is a fungible food, Rule 86A of the Rules would permit blocking of ITC to the extent of fraudulent and ineligible credit.

Relevant Provisions

In terms of Section 16(1) of the CGST Act, every registered person is entitled to take credit of the input tax charged on supply of goods or services or both, which is used or intended to be used in furtherance of his business. The said amounts are to be credited to the taxpayer’s ECL. 

However, the entitlement is subject to the conditions and restrictions as may be prescribed and, in the manner, as posited under Section 49 of the CGST Act. 

Section 16 (2) of the CGST sets out the conditions, which if not complied with disentitles a registered person of any credit of input tax in respect of supply of goods or services or both.

Section 16 (3)  of the CGST Act disentitles a taxpayer for any ITC in respect of a depreciable capital goods where the registered person has availed of depreciation on the tax component of the value of such capital goods. 

Section 16 (4) of the CGST Act sets out the time limit within which a registered person is entitled to take ITC.

Section 49(5) of the CGST Act prescribes the manner in which the amount of the ITC available in the ECL of a registered person can be used. Section 49A and 49B of the CGST Act prescribes the manner of utilisation of the ITC and the order in which the ITC is required to be utilised.

A brief purview of the provisions of the CGST Act clearly indicate that a taxpayer is entitled to ITC only to the extent as provided under the CGST Act and subject to the stipulated conditions being satisfied. There is no cavil that if the conditions as set out under the CGST Act are not satisfied, the registered taxpayer would not be entitled to avail and utilize the ITC in respect of supplies received by it.

The right to avail and utilize the ITC is thus a statutory right, which accrues by virtue of the provisions of the CGST Act and is subject to the conditions. This right to avail and utilise the ITC is a valuable right. It is, undeniably, an asset, which vests with a taxpayer if the taxpayer satisfies all the stipulated conditions for such entitlement.

The opening line of Rule 86A(1) of the GST Rules stipulates that an order under Rule 86A (1) can be passed only if the Commissioner or any other officer authorised by him in this behalf has reasons to believe that the credit of input tax available in the ECL has been fraudulently availed or is ineligible. If the said condition is satisfied, the officer may after recording the reasons in writing, not allow debit of an amount equivalent to such credit. 

Read More: BREAKING | GST Return Data Will Not Be Available To View Beyond 7 Years: GSTN

Conclusion

The court held that there is no cavil that ITC is availed by a registered person when he files a return and the same is credited in his ECL. The credit of input tax as available in the ECL is then available to the taxpayer for discharging his dues under the CGST Act or in given cases, for seeking its refund.

The court allowed the petitions and quashed the orders to the extent the orders disallow debit from the respective ECL of the petitioners, in excess of the ITC available in the ECL at the time of passing of the orders.

FAQs

Case Details

Case Title: Best Crop Science Pvt. Ltd. V/S Principal Commissioner, CGST Commissionerate, Meerut And Ors

Citation: W.P.(C) 10980/2024 and CM Nos.45297/2024 and 45298/2024

Counsel for the Petitioner:  Himanshu Tyagi and Jitin Singhal

Counsel for the Respondent: Harpreet Singh, SSC, Suhani Mathur, and Jatin Kumar Gaur

Date of Decision: 24.09.2024

Read Order