Pursuant to the enquiry initiated by the tax authorities, the department is of the prima facie view that the concerned suppliers of inputs, had issued only the tax invoices without supplying any tax paid inputs and the transactions of these input suppliers/registered dealers are only on paper and, therefore, the ITC availed by all the buyers including the Petitioner herein on such tax invoices of these input suppliers is inadmissible. Consequently, the Petitioner was required to deposit Rs. 25 lacs in cash. Further, ITC to the extent of appx. 84 lacs has been blocked by exercising the power u/r 86A. The request for refund of such tax paid and unblocking of ITC was rejected by the tax authorities. Aggrieved, the Petitioner filed a writ petition challenging such action of the department
The Petitioner argued that the blocking of ITC ledger amounts to curtailing indefeasible right of the assessee to avail the benefit of the ITC. It was also argued that the action taken by the department was without giving any notice and finalisation of assessment and therefore such action is invalid as that there was no valid material and facts basis which opinion was formed to block the ITC ledger of the applicant under Rule 86A. Furthermore, no such reason was communicated to Petitioner before taking action against them.
The Hon’ble HC noted that Rule 86A undoubtedly could be said to have conferred drastic powers upon the proper officers if they have reason to believe that the activities or invoices are suspicious. The Rule 86A is based on “reason to believe”. “Reason to believe” must have a rational connection with or relevant bearing on the formation of the belief. It is a subjective term and can be interpreted differently by different individuals.
Hon’ble HC rejects assessee’s “vociferous” claim that credit of tax paid on inputs, is an indefeasible right of the assessee vis-a-vis Rule 86A and that Rule 86A of the Rules extinguishes a vested right which the assessee has for claiming credit of duty paid on inputs. The HC remarks that since the writ applicants have not been able to avail the ITC and, in such circumstances, it cannot be said that they have an indefeasible right. The HC also opined that the aspect of availing the credit and utilization of credit as two different stages and declared that the utilization of the accrued credit is a vested. Further, the HC relying on the judgment of TUNGABHADRA INDUS. LTD. 2000 (118) E.L.T. 545 (S.C.) opined that accumulated credit could be utilized only subject to the conditions of the Notification and thus even in the case of accumulated credit, no vested right accrued.
The Gujarat HC also observed that the inquiry, so far, has revealed a prima facie case for the respondents to exercise the power under Rule 86A of the Rules. The HC opines that although, no specific order has been passed and communicated to the Petitioner in this regard, yet in the facts of the present case, it cannot be said that exercise of power under Rule 86A for the purpose of blocking the ITC is mala fide or without any application of mind.
The Hon’ble HC directs the revenue to complete the investigation within a period of four weeks from the date of the receipt of this order and to take appropriate actions regarding issue of show cause notice under section 74 or not.
The HC opines that power under Rule 86A should be used sparingly and only on subjective weighty grounds and reasons. The HC also remarks that the power under Rule 86A of the Rules should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.
Hon’ble court also urged the governments to apply its mind for the purpose of laying down some guidelines or procedure for the purpose of invoking Rule 86A of the Rules.
S.S. Industries vs. Union of India [C/SCA/8841/2020]
GLS Comments:
As the Constitutional validity of Rule 86A of the Rules was not challenged in the present case, the Hon’ble HC refrained from commenting on its validity in the absence of any specific challenge to the said provisions. The HC further observed that Rule 86A casts an obligation upon the authority concerned to form an opinion but is silent with regard to passing of any specific order assigning prima facie reasons for invoking Rule 86A. To this extent, the Government needs to look into the matter and issue appropriate guidelines and also lay down some procedure to be followed for the exercise of power under Rule 86A of the Rules, otherwise it is likely to result in harassment of the taxpayers
Disclaimer:
The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This update is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi judicial authorities may not take a position contrary to the views mentioned hereinrra quis.
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