No Reason To Believe That Input Tax Credit Is Fraudulently Availed: Punjab & Haryana High Court

The petitioner/assessee is a public limited company, engaged in the manufacturing of copper wire rod and submersible winding wire. As per the petitioner, the department/respondents blocked Input Tax Credit amounting to Rs.1.9 Crore lying in the Electronic Credit Ledger. The petitioner filed representations objecting to the action of the respondents.

The petitioner submitted that, as per the order, the basis for initiating action against the petitioner is a communication received from the Delhi North Commissionerate. As per the communication, one of the suppliers of the petitioner was found to be non-existing. The Show Cause Notice for cancellation of registration was issued to the supplier, which was, however, dropped. The suspension of registration of the supplier was revoked by the communication. Once the very basis of the proceeding against the petitioner has been withdrawn by the respondents themselves. There was no reason to block the Input Tax Credit of the petitioner.

The petitioner contended that the intent and purport of Rule 86A of the CGST Rules, 2017 is to secure the interest of revenue and that it is a sort of preventive measure. The petitioner is a running manufacturing unit having a turn-over running into multiple crores, thus there is no possibility of flying by night. The interest of revenue is always secured. The misappropriation or fraud, if any, has been committed by suppliers of the petitioner, for which the petitioner cannot be deprived of his valuable right of ITC. The denial of ITC is violative of Article 19(1)(g) and Article 21 of the Constitution of India.

The department contended that though the proceedings against the supplier were dropped, the proceedings against the supplier were again initiated and the GSTIN was cancelled.

The department submitted that an Intelligence Report was received from CIU, CGST-Vadodara Zone, which forms the basis of the investigation against the petitioner as well as the blocking of its ITC under Rule 86A of the CGST Rules, 2017. The petitioner had received ITC from seven different suppliers, who were part of a chain/racket involved in the generation and passing on of fake ITC without any inward supply at root level. As per the intelligence report, the petitioner was one of the beneficiaries of ineligible ITC from the chain/racket. The petitioner alone has received ITC worth Rs. 52.79 crores from seven suppliers in the chain/racket, including ITC worth Rs. 10.72 crores received from the supplier.

The provisions of Rule 86A of the CGST Rules are exercised where the prescribed officer has reason to believe that credit of input tax available in the Electronic Credit Ledger has been fraudulently availed or the assessee is ineligible. The prescribed authority's exercise was subject to a satisfaction recorded by the authority.opinion to the effect that the credit ledger has been fraudulently availed or the assessee is ineligible in the situations as prescribed under the Rule itself.

The court held that the reason for invoking the power conferred under Rule 86A of the CGST Rules against the petitioner is an intelligence report received from the Principal Chief Commissioner, Central Excise and Central Tax, Vadodara Zone. The report was regarding a racket of firms indulging in fake judicial and passing of illicit ITC.

"Merely by recording that some investigation is going on, a drastic and far-reaching action under Rule 86A of the CGST Rules cannot be sustained. There is no reason recorded by the Authority for exercising power under Rule 86A of the CGST Act, 2017 which would show an independent application of mind that can constitute reasons to believe which is sine qua non for exercising power under Rule 86A of the CGST Rules," the court observed.

The court observed that it is trite law that a speaking order has to be self-sustaining and respondents at this stage cannot be allowed to justify it by adding reasons to it by filing additional affidavits. From the reading of the order, it is evident that it is bereft of any material or 'reason to believe' that the petitioner is guilty of a fraudulent transaction or is ineligible under Section 16 of the CGST Act.

Case Title: Rajnandini Metal Ltd. Versus Union Of India

Citation : 2022 LiveLaw (PH) 140

Case No: CWP No.26661 of 2021

Dated: 31.05.2022

Counsel For Petitioner: Senior Advocate Jagmohan Bansal

Counsel For Respondent: Advocate Aman Garg

Click Here To Read/Download Order