Negative blocking is within the scope of provisions of Rule 86A of the CGST Rules

The Hon'ble Madras High Court in the case of Tvl. Shanthaguru Innovations Private Limited v. Commercial Tax Officer & Ors. [Writ Petition No. 29872 of 2024 dated November 28, 2024] dismissed the case and held that the negative blocking is well within the scope of provisions of Rule 86A of the Central Goods and Service Tax Rules, 2017 ("the CGST Rules"). The blocking of Input Tax Credit ("ITC") can be made to the extent of wrongful availment of credit, for which Rule 86A of the CGST Rules empowers State Authority not to allow debit of the amount equivalent to such wrongful availment of credit to the extent of available ECL at any point of time. Therefore, at the time of blocking, the availability of ITC in the ECL is immaterial.

Facts:

M/s Tvl. Skanthaguru Innovations Private Limited's ("the Petitioner") ECL had been blocked without the availability of any credit. The intimation for blocking of ECL was issued. Subsequent to the said blocking orders, the intimations were issued by the State Authority ("the Respondent") in FORM ASMT-10 dated September 26, 2024 ("the Impugned SCN"), which is pertaining to the issue of wrongful availment of ITC to the extent of a sum of Rs.13,10,44,864/.

The Central Authorities had already conducted the investigation at the Petitioner's premises and found that till March, 2024, the Petitioners had wrongfully availed a sum of Rs.6.3 Crores as ITC. Accordingly, the Central Authorities had issued summons with regard to the wrongful availment of ITC to the extent of Rs.6.3 Crores and subsequently, freezed the bank accounts of the Petitioners. Thereafter, the Petitioner paid a sum of Rs.1.3 Crores as GST to show their bonafide intent.

The attachment order passed by the Central Authorities was lifted and the bank accounts of the Petitioner and were de-freezed.

Further, the Respondent did not have any concurrent jurisdiction since the Central Authorities had already initiated proceedings for the very same issue by conducting the search at the Petitioner's premises.

The Petitioner contended that, for the purpose of blocking the ECL, the credit should be available in ECL of the Registered person at the time of blocking. If there is "Nil" balance in the credit ledger, there cannot be any negative blocking of credit since the same is not permissible under the provisions of Rule 86A of the CGST Rules.

When the ECL was initially blocked for a sum of Rs.72,902/-, a FORM DRC-01A was issued and the amount admitted in the said FORM DRC-01A was paid, whereby the dispute raised by the respondent had attained its finality. However, without considering the proceedings initiated by the Central Authorities, the State Authorities had also initiated a similar proceeding and issued the Impugned SCN.

The Central Authorities have issued FORM DRC-01A on October 08, 2024 with regard to the wrongful availment of a sum of Rs.13.10 Crores. Therefore, he would submit that the Impugned SCN issued by the State Authorities shall be quashed.

Further, due to the blocking of credit, the petitioners are not in a position to utilise the credit available in the ECL to an extent of Rs.2.48 Crores/-.

Hence, aggrieved by the Impugned Notice, the Petitioner had filed the present writ petition to unblock the ECL.

Issue:

Whether ECL can be blocked without availability of any credit?

Held:

The Hon'ble Madras High Court in Writ Petition No. 29872 of 2024 held as under:

• Observed that, the issue raised by the Central Authorities and the Respondent-1 is similar, the quantum of amount demanded by them are entirely different and the period of demand also differs. Thus, the question of cross-empowerment would not arise. Therefore, to the extent of difference in amount and period, the Respondent-1 will have power to issue the Impugned SCN. However, in the absence of any further orders, subsequent to the issuance of the Impugned Notice by the Respondent 1, it is pre-mature to decide as to whether the Respondent 1 are barred by cross empowerment or not.
• Noted that, Rule 86A of the CGST Rules would show that if the Commissioner or an Officer, not below the rank of Assistant Commissioner, having reason to believe that the credit of ITC available in ECL has been fraudulently availed or ineligible under the circumstances mentioned in Clauses (a) to (d) of Rule 86A(1) of GST Rules, for the reasons to be recorded in writing, not allow the debit of amount equivalent to such credit in ECL for discharge of any liability under Section 49 of the CGST Act.
• Opined that, In the case on hand, the Rule was incorporated to stop debiting the ITC from ECL, which was availed fraudulently by virtue of bogus invoice and other situations mentioned in Clauses (a) to (d) of Rule 86A(1) of CGST Rules. Thus, the object of Rule 86A of the CGST Rules is to prohibit the debiting of ITC from the ECL to the extent of fraudulently availed credit. Therefore, at no stretch of imagination, one could construed that no blocking orders can be passed at the time of zero balance of ITC in the ECL. Since the negative blocking can continue up to the stage of accumulation of ITC to the extent of wrongful availment of credit in the ECL, the blocking orders can be issued even at the time of zero balance of ITC in the ECL.
• Noted that, the negative blocking is well within the scope of provisions of Rule 86A of GST Rules. The blocking of ITC can be made to the extent of wrongful availment of credit, for which Rule 86A of the CGST Rules empowers State Authority not to allow debit of the amount equivalent to such wrongful availment of credit to the extent of available ECL at any point of time. Therefore, at the time of blocking, the availability of ITC in the ECL is immaterial. The blocking orders would cover both the amount available in the ECL at the time of passing orders and the amount to be accumulated subsequently into the ECL to the extent of the amount mentioned in the blocking order. Thus, the Authorities are empowered to pass the blocking orders, in the present case, up to the maximum extent of a sum of Rs.13.10 Crores towards the wrongful availment of credit.
• Held that, the State Authorities are empowered to pass blocking orders to the extent of credit, which was fraudulently availed and available in ECL for discharge of output tax liabilities either at the time of blocking or subsequently, in the event if the same was already utilised. Though the issues raised by the Central and State Authorities are similar in nature, if the period, for which the notice was issued, is different, both the Authorities are empowered to initiate the proceedings for the respective period. Hence, the writ petition was dismissed.

Our Comments:

Rule 86A of the CGST Rules governs "Conditions of use of amount available in electronic credit ledger" Rule 86A(1) of the CGST Rule states that the Commissioner or an officer authorised 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

1. the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36- i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or ii. without receipt of goods or services or both; or
2. the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
3. the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, 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.

Further, Rule 86A(2) of the CGST Rules states that the Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit. Lastly, such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.

Recently in the pari materia case of Karuna Rajendra Ringshia v. Commissioner of Central Goods and Service Tax [Writ Petition (Civil) No. 7250 of 2024 dated October 21, 2024], the Delhi High Court held that it is not permissible to block ECL that would result negative balance.

However, in the case of Samay AlloysIndia Pvt. Ltd. v. State of Gujarat [2022 (61) GSTL 421 (Guj.)], the division bench of the Gujarat High Court held that the power conferred under Rule 86A to block the credit cannot be invoked by the State Authorities in the case, where credit of ITC is not available in ECL or such credit has already been utilised. The Hon'ble Delhi High Court in the case of Best Crop Science Pvt. Ltd. v. Principal Commissioner, GST Commissionerate [(2024) 22 Centax 531(Del.)] held in similar lines.

The Madras High Court in the present case analysed the Rule 86A of the CGST Rules.

The 1st part of Rule 86A of the CGST Rules contains that "The Commissioner or an officer authorised 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". This part of Rule 86A(1) of the CGST Rules alone was interpreted by both the Courts while giving their findings. The literal interpretation of this 1 st part of the provisions of Rule 86A(1) would shows that if the Commissioner or the Assistant Commissioner having reason to believe that the ITC available in ECL has been fraudulently availed or ineligible, the said ECL can be blocked under the circumstances mentioned in Rule 86A(1)(a) to (d) of the CGST Rules.

The 2nd part of the Rule 86A of CGST Rules, states that as "may, for the reasons to be recorded in writing, not allow debit of an amount equivalent to such credit available in electronic credit ledger for discharge of liabilities under Section 49", which means the Officers have to record the reasons in writing not to allow the debit of amount equivalent to such credit for discharge of liabilities under Section 49. The word "amount equivalent to such credit for discharge of liabilities" would mean that not only the fraudulently availed ITC amount available in the ECL, but an amount equivalent to fraudulently availed credit utilised for discharge of liabilities under Section 49 of the CGST Act.

Thus, a conjoint reading of 1st and 2nd parts of Rule 86A of CGST Rules would clearly reveal that the word "available in the ECL" referred in 1st part would mean that the amount available after the fraudulent availment of credit at any point of time, whether it was available in the ECL or utilised at the time of passing the blocking orders. Hence, the 2nd part of Rule 86A of CGST Rules empowers the Authorities not to allow the debit of amount equivalent to the fraudulently availed credit for discharge of liabilities under Section 49 of the CGST Act. If it was already utilised, the Officials are also empowered to pass blocking orders to the extent of amount equivalent to such credit, which was already utilised, along with the unutilised fraudulently availed ITC amount available in the ECL at the time of passing the blocking orders.

Both the Hon'ble Division Bench of Gujarat High Court and the Hon'ble Delhi High Court have taken into consideration of the 1st part of the Rule 86A of the CGST Rules and literally interpreted the same. On the other hand, a conjoint reading of 1st part along with the 2nd part of Rule 86A of the CGST Rules would shows that "the amount available in the ECL" refers to the fraudulently availed ITC, which was made available in the ECL at any point of time before utilisation.

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