Milap Scrap Traders Through Pro. ... vs State/ Commercial Tax Officer on 23 March, 2022

Outcome**
The Gujarat High Court allowed the writ application. It directed the respondents to immediately withdraw the negative block of Rs. 14,11,678/- from the petitioner's Electronic Credit Ledger (ECL). The Court ruled that the condition precedent for exercising power under Rule 86A of the CGST Rules, 2017, is the availability of credit in the ECL. Once the negative block is removed, the petitioner is allowed to file their GST returns, but any remaining positive balance in the ECL after removing the negative block shall not be utilized until a show cause notice (if any) under Section 73 or 74 of the CGST Act is issued.

2. Core Issue
The core issue was the legality of the Commercial Tax Officer blocking the Input Tax Credit (ITC) in the Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules, 2017, particularly when such blocking resulted in a "negative block" or was invoked when no credit was "available" in the ECL.

3. Key Facts
* The petitioner, Milap Scrap Traders, sought to unblock ITC amounting to Rs. 7,68,554/- of CGST and Rs. 7,68,549/- of SGST, totaling Rs. 15,37,103/-.
* The petitioner's Electronic Credit Ledger (ECL) reflected a negative figure of Rs. 14,11,678/- due to the blocking.
* The petitioner's grievances regarding the blocking were not addressed, and no show cause notice had been issued.
* The blocking prevented the petitioner from raising E-way bills and filing GSTR-3B returns.

4. Arguments (Taxpayer vs Revenue)

• Taxpayer (Petitioner):

  • Strongly objected to the invocation of Rule 86A on the grounds that it requires "credit of input tax available in the electronic credit ledger" to be invoked.
  • Argued that Rule 86A is not applicable in cases where no ITC is available or to create a negative balance in the ledger.
  • Contended that the rule cannot be used to make debit entries in the ECL, as this amounts to permanent recovery, which is governed by statutory provisions (Sections 73 or 74), not Rule 86A which is a provisional measure.
  • Highlighted that the heading of Rule 86A – "conditions of use of amount available in electronic credit ledger" – inherently suggests the prerequisite of available credit.
  • Emphasized that authorities are not without remedies and can initiate proceedings under Sections 73 or 74 for recovery or provisional attachment under Section 83.
  • Submitted that the phrase "equivalent to such credit" in Rule 86A implies "available credit."

• Revenue (Respondent):

  • (Implicitly, from the arguments addressed in the relied-upon precedent Samay Alloys): Argued that such a strict interpretation of Rule 86A might render it ineffective, as parties could immediately utilize fraudulently availed credit.
  • Contended that the legislature consciously used the expression "equivalent to such credit" instead of "equivalent to such available credit," implying that availability in the ledger at the moment of blocking is not a prerequisite.

5. Court’s Reasoning
The Court primarily relied on its recent judgment in Samay Alloys India Pvt. Ltd. vs. State of Gujarat. Its reasoning can be summarized as follows:

• Prerequisite for Rule 86A: The Court held that the fundamental condition precedent for invoking Rule 86A(1) is the actual availability of input tax credit in the electronic credit ledger. If no ITC was available, blocking the ECL and inserting a negative balance is "wholly without jurisdiction and illegal."
• Scope of Rule 86A: Rule 86A empowers authorities to disallow debit of an amount equivalent to the alleged fraudulent or ineligible credit, but it does not permit making debit entries in the ECL or creating a negative balance. Such actions amount to permanent recovery, which must follow the due process outlined in Sections 73 or 74 of the CGST Act. Rule 86A is a temporary and provisional measure.
• Interpretation of Statutory Language:
  • The Court referred to the heading of Rule 86A ("Conditions of use of amount available in electronic credit ledger") as an aid to interpretation, reinforcing that credit must be available for the rule to apply.
  • It rejected the Revenue's argument that the omission of the word "available" before "credit" in "equivalent to such credit" in Rule 86A was significant, stating that the expression necessarily implies "available credit."
• Availability of Other Remedies: The Court noted that the government has ample alternative remedies, such as initiating recovery proceedings under Sections 73 or 74, cancelling registration under Section 29, or provisionally attaching property under Section 83 of the CGST Act, to address fraudulent or ineligible ITC. Rule 86A is not the sole or primary tool for recovery.
• Extraordinary Power: The Court emphasized that the power to restrict debit from the ECL under Rule 86A is "extremely harsh" and "extraordinary" and must be exercised "strictly by specific statutory language" and with "utmost circumspection and with maximum care and caution," based on "objective determination" and "material evidence."
• Circular Support: The Court noted that Kerala State Tax Circular No. 04/2021 (dated 24.05.2021) and CBIC Circular (dated 2nd November 2021) also supported the principle that blocking is an emergency, temporary measure and that full demand creation should follow Sections 73/74 proceedings. The Kerala circular specifically clarified that if there is Nil or insufficient balance in a tax head, blocking of other tax heads is only permissible subject to cross-utilization limitations, implicitly acknowledging the need for existing credit.

6. Statutory References
* Constitution of India: Article 226
* Central Goods and Services Tax Act, 2017 (CGST Act):
* Section 29 (Cancellation of registration)
* Section 39(7) (Filing of returns)
* Section 49 (Payment of tax and other amounts)
* Section 73 (Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for reasons other than fraud or willful misstatement or suppression of facts)
* Section 74 (Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or willful misstatement or suppression of facts)
* Section 83 (Provisional attachment of property)
* Central Goods and Services Tax Rules, 2017 (CGST Rules):
* Rule 36 (Documentary requirements and conditions for claiming input tax credit)
* Rule 86A (Conditions of use of amount available in electronic credit ledger)
* Central Excise Act, 1944: Section 11 (referred to in Rohtas Industries case)
* Central Excise Rules, 1944: Rules 9-B, 10, 10-A, 173-A to 173-I, Chapter VII-A (referred to in Rohtas Industries case)

7. Precedents Cited
* Samay Alloys India Pvt. Ltd. vs. State of Gujarat (Special Civil Application No.18059 of 2021 decided on 3rd February 2022) - Primary precedent relied upon.
* Rohtas Industries Limited Vs. Superintendent of Central Excise (2000) 123 ELT 124 (Patna High Court)
* Uttamdas Chela Sunder Das vs. SGPC (1996) 5 SCC 71 (Supreme Court)
* Bhinka & Ors. vs. Charan Singh, AIR 1959 (SC) 906 (Supreme Court)
* Commissioner of Income Tax, Madras vs. Kasturi & Sons Ltd., (1999) 3 SCC 346 (Supreme Court)
* Kapil Mohan vs. Commissioner of Income Tax, Delhi (1999) 1 SCC 450 (Supreme Court)
* S.S. Industries vs. Union of India, (2021) 87 GSTR 71 (Guj.) (Gujarat High Court)
* The Union of India v. Prithivi Cotton Mills Ltd. (Second Appeal 531 of 1965 decided on 15-3-1971 (Guj)) - Distinguished.