Works vs The Assistant Commissioner Of Revenue on 28 July, 2022

Outcome**
The intra-Court appeal filed by the writ petitioner (Works) was dismissed. The High Court upheld the Single Bench's order, which had directed the Assistant Commissioner to adjudicate the show-cause notices while maintaining the blocking of the electronic credit ledger. The Assistant Commissioner was directed to conclude the adjudication proceedings expeditiously, within 8 weeks.

2. Core Issue
The core issue was the interpretation of Rule 86A of the Central Goods and Services Tax Rules, 2017 (CGST Rules) and West Bengal Goods and Services Tax Rules, 2017 (WBGST Rules). Specifically, whether the power to block input tax credit (ITC) in the electronic credit ledger under Rule 86A can be exercised when the balance in the ledger is NIL or insufficient on the date of the blocking order, or if it pertains to ITC that has been fraudulently availed or is ineligible at an earlier time. The Court also addressed whether the right to claim ITC is a "vested right."

3. Key Facts
* The appellant (M/s. N.M.D. Engineering Works) received three show-cause notices (SCNs) on 20.01.2022 and 28.01.2022 from the Assistant Commissioner.
* The SCNs alleged a mismatch between the appellant's input tax credit in Form GSTR-2A and their suppliers' outward supplies in GSTR-1 and GSTR-3B for tax periods from April 2018 to March 2021, rendering the ITC inadmissible under Section 42(1)(a) of the WBGST/CGST Act.
* The appellant was asked to explain or pay the tax by 04.02.2022. A payment of Rs. 10 lakhs was made on 30.03.2022, but no reply to the SCNs was submitted within the stipulated time.
* On 23.05.2022, the Assistant Commissioner issued an order under Rule 86A, disallowing the debit of IGST amounting to Rs. 2,67,96,042/- from the appellant's electronic credit ledger.
* Subsequently, on 30.05.2022 and 31.05.2022, the appellant submitted representations requesting revocation of the blocking order and extension of time to reply to the SCNs.
* On 13.06.2022, the appellant filed a detailed reply to the SCNs.
* The appellant filed a writ petition (WPA 9820 of 2022, affirmed on 06.06.2022) challenging the blocking order.
* The Single Bench, on 20.06.2022, disposed of the writ petition, directing the Assistant Commissioner to consider the appellant's reply, provide a hearing, and pass a reasoned order expeditiously, and to revoke the blocking if a case was made out.
* The appellant filed the present intra-Court appeal against the Single Bench's order.

4. Arguments

Taxpayer (Works):
* The blocking of ITC under Rule 86A is invalid and bad in law when proceedings under Section 73 are ongoing, as it amounts to recovery of demand without adjudication.
* Rule 86A permits blocking only to the extent credit is available in the electronic credit ledger. As the ledger had a NIL balance when the order was passed, it constitutes "negative blocking," which is not provided for under the Rule.
* Once reasons to believe culminate in an SCN under Section 73/74, the blocking of the electronic credit ledger cannot be sustained.
* Negative blocking permanently recovers alleged ineligible ITC even before adjudication, forcing the appellant to make additional payments.
* Blocking the electronic credit ledger hinders the appellant's business operations and ability to file monthly returns.
* Restricting ITC utilization infringes on a "vested right."
* Relied on Gujarat High Court judgments (e.g., Samay Alloys India Pvt. Ltd.) which held that Rule 86A requires a positive balance in the electronic credit ledger for blocking.

Revenue (Assistant Commissioner):
* The appellant's conduct (delayed submission of SCN replies) should be considered.
* Adjudication proceedings under Section 73/74 are active, and the appellant should participate.
* Rule 86A allows blocking if the authority has "reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible."
* The word "available" in Rule 86A(1) should be read to mean the credit which was available at the relevant time when it was fraudulently availed or became ineligible, not necessarily the balance at the moment of blocking. This interpretation is supported by the phrase "has been."
* Interpreting the Rule otherwise would make it unworkable and redundant.
* Rule 86A does not aim for immediate recovery but acts as a deterrent by creating a lien, preventing utilization pending adjudication.
* Relied on the Allahabad High Court judgment (R M Dairy Products LLP) which supported this interpretation of "available" and "has been."

5. Court’s Reasoning
* Nature of ITC: The Court first clarified that input tax credit is a concession, not a "vested right." Entitlement to ITC is strictly conditional on compliance with statutory provisions, citing Supreme Court precedents (Jayam & Co., ALD Automotive Pvt. Ltd.) and Madras High Court (P.R. Many Electronics).
* Interpretation of Rule 86A: The Court adopted the interpretation of Rule 86A as laid down by the Allahabad High Court in R M Dairy Products LLP, rejecting the view taken by the Gujarat High Court in Samay Alloys India Pvt. Ltd. and its progeny.
* "Available" and "Has Been": The Court held that the word "available" in Rule 86A(1) cannot be read in isolation. It must be read in conjunction with the subsequent phrase "has been fraudulently availed or is ineligible." The phrase "has been fraudulently availed" clearly refers to a situation that occurred in the past. Therefore, the power under Rule 86A can be invoked for ITC that was available and subsequently found to be fraudulently or ineligibly availed during the relevant past periods, even if the ledger balance is currently NIL.
* Purpose of Rule 86A: The Court reasoned that Rule 86A acts as a deterrent, creating a lien on the credit and preventing its utilization pending adjudication of fraudulent or ineligible availment. It is not a recovery provision but ensures that the alleged ineligible credit cannot be further utilized.
* Statutory Interpretation: The Court emphasized cardinal principles of statutory interpretation, stating that provisions should be read to give full meaning to all words, prevent redundancy, and avoid interpretations that defeat the purpose of the legislation (citing Kasturi and Sons Limited, Directorate of Enforcement, Utkal Contractors & Joinery (P) Ltd., State of West Bengal, Sevantilal, State of T.N. vs. M.K. Kandaswami). An interpretation requiring a positive balance at the time of blocking would render Rule 86A otiose.
* "Negative Blocking": The Court found no statutory basis for the term "negative blocking" and rejected its introduction into statutory interpretation.
* Kerala Circular: The Court noted that the Kerala circular cited by the appellant did not support the interpretation that Rule 86A is inapplicable if the ledger balance is NIL, but rather guided officers on blocking credit across different tax heads.
* Impact on Business: The Court found the argument that blocking prevents business operations unpersuasive, as the appellant is only prevented from utilizing the ITC from the electronic credit ledger, not from carrying on business by other means (e.g., making cash payments for tax liability).
* Conclusion: The Single Bench's decision to direct adjudication while not interfering with the blocking order was deemed appropriate.

6. Statutory References
* Central Goods and Services Tax Act, 2017 (CGST Act):
* Section 37 (Furnishing details of outward supplies)
* Section 38 (Furnishing details of inward supplies)
* Section 39 (Furnishing of returns)
* Section 41 (Claim of input tax credit and provisional acceptance thereof)
* Section 42(1)(a) (Matching, reversal and reclaim of input tax credit)
* Section 43 (Matching, reversal and reclaim of reduction in output tax liability)
* Section 49 (Payment of tax)
* Section 73(a) (Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for reasons other than fraud...)
* Section 74 (Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud...)
* Section 140
* Chapter IX (Returns)
* Central Goods and Services Tax Rules, 2017 (CGST Rules):
* Rule 36 (Document prescribed for ITC)
* Rule 85(7) (Electronic Liability Register)
* Rule 86(6) (Electronic Credit Ledger)
* Rule 86A (Conditions of use of amount available in electronic credit ledger)
* Rule 86A(1), 86A(1)(a)(ii), 86A(3)
* West Bengal Goods and Services Tax Rules, 2017 (WBGST Rules):
* Rule 86A
* Tamil Nadu Value Added Tax Act (Contextual reference)
* Madras General Sales Tax Act, 1959, Section 7-A (Contextual reference)

7. Precedents Cited
* Cited by Taxpayer (rejected by Court on interpretation of Rule 86A):
* Samay Alloys India Pvt. Ltd. Versus State of Gujarat, MANU/GJ/0572/2022
* New Nalbandh Traders Versus State of Gujarat and Ors., MANU/GJ/0631/2022
* Milap Scrap Traders Versus State/Commercial Tax Officer, MANU/GJ/0796/2022
* Cited by Revenue (followed by Court on interpretation of Rule 86A):
* R M Dairy Products LLP Versus State of U.P. and 3 Ors.; Writ Tax No. 434 of 2021 dated 15.07.2021
* Cited by Court (for general principles of ITC and statutory interpretation):
* Jayam & Co. Versus Assistant Commissioner (Ct) and Another, (2016) 15 SCC 125
* ALD Automotive Pvt. Ltd. Versus Commercial Tax Officer & Others, (2019) 13 SCC 225
* P.R. Many Electronics Versus Union of India, WP No. 8890 of 2020 etc. batch dated 13.07.2020 (Madras High Court)
* Commissioner of Income Tax, Madras Versus Kasturi and Sons Limited, (1999) 3 SCC 346
* Directorate of Enforcement Versus Deepak Mahajan, (1994) 3 SCC 440
* Utkal Contractors & Joinery (P) Ltd. Versus State of Orissa, (1987) 3 SCC 279
* State of West Bengal Versus UOI, AIR 1963 SC 1241
* Sevantilal Versus CIT, AIR 1968 SC 697
* State of T.N. Versus M.K. Kandaswami, (1975) 4 SCC 745