The Division Bench of Hon’ble Bombay High Court [Nagpur Bench], in W.P.(C) No. 2693 of 2021, while deciding a Petition wherein challenge to the blocking/freezing of the Electronic Credit Ledger (“ECL”) under Rule 86-A of the CGST Rule was made, held that power to block ECL is drastic in nature and therefore all the requirements of Rule 86-A would have to be fully complied with before the power under Rule 86-A is exercised.
The Department blocked the ECL of the Petitioner company restraining the Company from utilising the availed credit of Rs. 48.79 Crores on account of allegation of fraud. The Petitioner challenged the action/order of the department contending that the ECL has been blocked by the Department without following the mandatory requirement of “reason to believe” and “reasons to be recorded in writing” prescribed under Rule 86-A. The action of the blocking of the ECL without providing any hearing opportunity was also challenged by the Petitioner.
The Petitioner also contended that the property of the Company and blocking of the ECL without following the procedure as prescribed in the statute amounts to illegal provisional attachment of the property under Section 83 of the CGST Act.
The Department contented that Rule 86-A is wide enough to empower the authority to block/freeze the ECL of the Petitioner. Furthermore, the only requirement of Rule 86-A is the “satisfaction of the authority” and no hearing is required to be provided before blocking of the Portal.
Issues & Ruling of Hon’ble Bombay High Court
Issue 1: Whether blocking of Electronic Credit Ledger (ECL) under Rule 86-A of the Central Goods and Services Tax Rules, 2017 amounts to provisional attachment of property under section 83 of the Central Goods and Services Act, 2017 and if so, whether it could have been done without following conditions and procedure prescribed in section 83 of the Central Goods and Services Tax Act, 2017?
Held: While deciding the First issue, the Hon’ble Court held that blocking/freezing of the ECL under rule 86-A cannot be equated with the provisional attachment of property under section 83 of CGST Act. The aforesaid ruling of the Hon’ble Court stood on the following reasoning:
- In attachment of property under Section 83 of the CGST Act, the custody of the property is, actually or symbolically, taken over by the department with a view to protect the property from being transferred or altered in character, so that it can be appropriated, if the need arises, for realising tax dues.
- However, in case of blocking of ECL under rule 86-A, the custody of the property remains with the tax prayer but disability is created on his capacity to utilise it or receive the refund of unutilised credit.
Issue 2: Whether rule 86-A of Rules, 2017 permits blocking of the ECL, and if yes, to what extent?
Held: It was held that Rule 86-A of Rules, 2017 does permit dis-allowance of debit of an amount to the electronic credit ledger only to the extent of fraudulent or wrong availment of credit in the ECL and such disallowance can be done through blocking of the ECL to the extent of the amount fraudulently or wrongly shown as lying-in credit in the ECL. It was further held that the Department does not have authority to impose blanket ban on the ECL.
Issue 3: Whether the order passed by the Department of blocking of Electronic Credit Ledger (ECL) is arbitrary and illegal?
Held: The Hon’ble Court held that the primary requirement under Rule 86-A before blocking the Portal is that that (i) The Competent Authority has to satisfy himself on the basis of material before him before blocking ECL; (ii) The Competent Authority has to record the reasons in writing for exercising the power under Rule 86-A. The Hon’ble Court noted that the aforesaid primary requirements not being followed in the present case, set aside the order passed by the Department on the grounds of arbitrariness and illegality.
The Court also went on to hold that power to block ECL is drastic in nature and therefore all the requirements of Rule 86-A would have to be fully complied with before the power under Rule 86-A is exercised. To quote from the judgement:
“33. It must be noted that the power under rule 86-A which in effect is the power to block ECL to the extent stated earlier is drastic in nature. It creates a disability for the taxpayer to avail of the credit in ECL for discharge of his tax liability, which he is otherwise entitled to avail. Therefore, all the requirement of Rule 86-A would have to be fully complied with before the power thereunder is exercised. When this rule requires arriving at a subjective satisfaction which is evident from the use of words, “must have reasons to believe”, the satisfaction must be reached on the basis of some objective material available before the authority. It cannot be made on the flights of ones fancies or whims or imaginations.”
This is yet another classic case where the illegality and the arbitrariness of the Department can be seen. It is pertinent to note here even the Hon’ble Apex Court in the case of M/s Radha Krishan Industries v. State Of Himachal Pradesh & Ors 2021 (4) TMI 837 – SC has taken a stern view against the department’s exercise of powers under Section 83 [provision for provisional attachment of property] of the CGST Act without following the mandatory statutory requirement. The Department needs to understand that unless the statutory requirements are not followed in the prescribed manner, the drastic actions of blocking the ECL, provisionally attaching the property, etc. would be struck down at the level of Constitutional Court.
Read the judgement of the Hon’ble High Court @ Dee Vee Projects Ltd. Versus The Government of Maharashtra, Department of Goods and Services Tax