Rule 86A Of CGST Rules 2017 Does Not Imposes Any Burden To Be Discharged By Taxpayer To Be Entitled To Input Tax Credit: Delhi HC

At the same time, the High Court clarified that Rule 86A of CGST Rules 2017 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 authorized by him has reasons to believe has been wrongfully availed.

The Division Bench of Justice Vibhu Bakhru and Justice Sachin Datta observed that “when Rule 86A(1) of the Rules refers to the ITC available in the ECL of a taxpayer (which the Commissioner or the officer authorized by him has reason to believe has been fraudulently availed or is ineligible), it clearly refers to the amount that is lying to the credit of the taxpayer in his ECL”. (Para 69)

Where the Commissioner has a reason to believe that the tainted ITC is less than the ITC credited in the ECL, then the order under Rule 86A(1) would be confined to such amount as equivalent to the ITC, which the Commissioner has reasons to believe has been fraudulently availed or is ineligible, added the Bench.

Facts of the case

The petitioner/ taxpayer, had approached the High Court challenging the orders passed by the Commissioner under Rule 86A of CGST Rules, 2017 blocking the input tax credit (ITC) in excess of credit available in respective Electronic Credit Ledgers (ECLs). The petitioner contended that the same had created artificial negative balance in the ECL. Resultantly, till the negative balance in the ECL of respective petitioner 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, it was pleaded that only the ITC remaining after adjusting the negative balance, would be available to the taxpayer for discharging its dues.

Arguments of respective counsels

The petitioner contended that Rule 86A does not permit blocking of the ITC, which is unavailable in a taxpayer's ECL. They claim that 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.

Opposing the same, the respondent/ Revenue Department argued that 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 said amount is not confined to the credit balance of the ITC as available on the date of the order under Rule 86A, and 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 utilize 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.

Observation of the High Court

The Bench noted that the debate in the present petition revolves around interpretation of Rule 86A vis-à-vis nature of the right of a taxpayer to avail ITC.

The Bench explained that the right to avail and utilize the ITC is a statutory right and an asset, which accrues by virtue of the provisions of the CGST Act, and which vests with a taxpayer if he satisfies all the stipulated conditions for such entitlement.

The exercise of power under Rule 86A effectively denies a taxpayer its ability to discharge its dues by utilizing the ITC or seeking a refund which it is entitled to do under the CGST Act and the Rules, added the Bench.

The Bench explained that an order under Rule 86A in effect reduces the working capital available to a taxpayer, and thus, notwithstanding that the entitlement to ITC can be curtailed by the provisions of the CGST Act and Rules, an act of blocking taxpayer's ITC, which is availed by the taxpayer has significant adverse consequences as far as a taxpayer is concerned.

Rule 86A is not a provision for recovery of tax or other dues, but it enables the concerned authority to take temporary measures for the protection of the interest of revenue, added the Bench.

Thus, the Bench clarified that Rule 86A does not impose a condition, which the taxpayer has to satisfy for availing the ITC as the same stands credited in the assessee's ECL.

Moving forward, the Bench found that at the stage of issuing an order under Rule 86A, there is no determination that the ITC availed by the assessee is fraudulent or ineligible.

At the same time, Rule 86A is not a provision, which imposes a burden to be discharged by the taxpayer to be entitled to the ITC, added the Bench.

The Bench observed that “order under Rule 86A (1) can be passed only if the Commissioner or any other officer authorized 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”.

Hence, if there is no credit of input tax available in the ECL, one of the necessary conditions for passing an order under Rule 86A(1) would not be satisfied, added the Bench.

Also, the Bench explained that the fact that the Commissioner (or an officer authorized by him) may have reasons to believe that in the past a taxpayer had availed and utilized ITC by debiting its ECL is not the condition precedent for passing an order under Rule 86A(1).

Hence, the High Court allowed the Assessee's petition and quashed the orders disallowing debit from the respective ECL of the petitioners, in excess of the ITC available in the ECL.

Counsel for Petitioner/ Assessee: Himanshu Tyagi and Jitin Singhal

Counsel for Respondent/ Revenue: Harpreet Singh, Suhani Mathur and Jatin Kumar Gaur

Case Title: Best Crop Science Pvt. Ltd. versus Principal Commissioner, CGST Commissionerate, Meerut and ors

Case Number: W.P.(C) 10980/2024

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