K-9 Enterprises vs The State Of Karnataka on 2 April, 2024

Outcome
The High Court allowed all the writ appeals, setting aside the common order passed by the learned Single Judge and quashing the impugned orders by the revenue authorities that blocked the Electronic Credit Ledgers (ECL) of the appellants under Rule 86A of the CGST Rules, 2017.

Core Issue
The core issues before the High Court were:

• Whether the revenue authorities were justified in not providing a pre-decisional hearing to the appellants before blocking their Electronic Credit Ledgers (ECL) under Rule 86A of the CGST Rules.
• Whether the revenue authorities were justified in blocking the ECL by invoking Rule 86A of the CGST Rules, specifically regarding the requirement of "reasons to believe" and independent application of mind.
• Whether the order of the learned Single Judge, which upheld the revenue's actions, warranted interference.

Key Facts

• The appellants are registered GST dealers involved in businesses like Lead and lead scrap.
• They availed Input Tax Credit (ITC) on purchases, which was available in their Electronic Credit Ledgers (ECL).
• On June 27, 2023, the respondents (revenue authorities) blocked the appellants' ECL by invoking Rule 86A of the Central Goods and Services Tax Rules, 2017.
• The blocking was based on a "Field visit report by the Asst. State Tax Officer, Vasco-D-Gama, (Goa)", which indicated that some suppliers were non-existent or not conducting business from their registered premises.
• The appellants challenged this action in writ petitions, arguing against the lack of a prior hearing and the basis for blocking the ECL.
• The learned Single Judge rejected the appellants' contentions and upheld the blocking of ECL, prompting these intra-court appeals.

Arguments (Taxpayer vs Revenue)

• Taxpayer (Appellants, supported by Amicus Curiae):
  • The blocking of ECL entails serious civil consequences, necessitating a pre-decisional hearing, and a post-decisional hearing is not a sufficient substitute.
  • Rule 86A is a drastic and draconian power, requiring strict compliance with all conditions, including the existence of "reasons to believe".
  • The "reasons to believe" must be based on the proper officer's independent analysis and objective material, not on "borrowed satisfaction" from another officer's investigation report (e.g., Goa field visit).
  • The onus is on the revenue to demonstrate fraudulent or ineligible ITC was deliberately availed.
  • A bona fide purchaser should not be denied ITC due to a supplier's default without verifying the genuineness of the transaction.
  • Blocking ECL defeats the purpose of VAT, leading to a cascading effect and irreparable injury to a valuable right.
  • The revenue's actions were contrary to its own CBIC Circular dated 02.11.2021, which mandates proper application of mind, careful examination, and utmost circumspection.
  • Since notices under Sections 73 or 74 have already been issued for adjudication, the drastic measure of blocking ITC without a prior hearing should be withdrawn.
  • The appellants are not flight risks or "fly-by-night" operators.
• Revenue:
  • Supported the order of the learned Single Judge, implicitly arguing that the blocking of ECL under Rule 86A was justified and that a pre-decisional hearing was not mandatory or that post-decisional hearing was adequate.

Court’s Reasoning
The High Court meticulously addressed both core issues:

• On Pre-Decisional Hearing:

  • The Court held that even though Rule 86A does not explicitly provide for it, the principles of natural justice, specifically the requirement of a pre-decisional hearing, must be read into the provision.
  • Blocking ECL for up to a year results in "serious civil consequences" for the taxpayer, thus mandating an opportunity to be heard.
  • Citing Supreme Court precedents (e.g., C.B. Gautam, Sahara India Firm, K.I. Shephard, H.L. Trehan), the Court reiterated that a post-decisional hearing is generally no substitute for a pre-decisional one, as authorities tend to uphold their initial decisions.
  • The Court noted that ITC utilization is not instantaneous like bank withdrawals, allowing sufficient time for a pre-decisional hearing, during which the revenue could still monitor the ECL. Therefore, there were no extraordinary circumstances to justify dispensing with a prior hearing.
  • The Single Judge's finding that a pre-decisional hearing was not required was deemed erroneous.

• On "Reasons to Believe" and Application of Mind:

  • The Court agreed that Rule 86A requires "reasons to believe" based on material evidence and that such reasons must be recorded in writing. However, it found that the Single Judge erred in concluding these conditions were met by the revenue.
  • It emphasized that "reasons to believe" must stem from the independent inquiry and satisfaction of the competent officer, not from "borrowed satisfaction" or a mere communication from another officer (like the Goa field visit report).
  • The power under Rule 86A is "draconian," demanding "utmost circumspection" and "maximum care and caution," as outlined in the CBIC Circular dated 02.11.2021. It requires an objective determination based on "intelligent care and evaluation," not subjective suspicion or mechanical action.
  • The Court found that the impugned blocking orders were passed mechanically, based solely on external communication, without the officer independently applying their mind. This violated the administrative law principle: "when a thing is directed to be done in a particular manner, it must be done in that manner or not at all."
  • The revenue did not verify the genuineness of the transactions or prove deliberate fraud by the appellants, merely relying on the non-existence of suppliers at a later date, which might not reflect the situation at the time of the transaction.
  • The Court referenced Xiaomi Technology India (P) Ltd. and the Supreme Court's decision in Radha Krishan Industries (dealing with provisional attachment under Section 83 CGST Act), reinforcing the need for tangible material, independent formation of opinion, and adherence to the doctrine of proportionality for such drastic measures.
  • Consequently, the impugned orders were found to be bald, vague, cryptic, laconic, unreasoned, and non-speaking, failing to satisfy the mandatory prerequisites of Rule 86A.

Statutory References

• Central Goods and Services Tax Rules, 2017 (CGST Rules):
  • Rule 36
  • Rule 86A (sub-rules 1, 2, 3)
• Central Goods and Services Tax Act, 2017 (CGST Act):
  • Section 49
  • Section 73
  • Section 74
  • Section 83
  • Section 107 (sub-sections 6, 7)
  • Sections 62, 63, 64, 67 (mentioned in context of Section 83)
• Income Tax Act, 1961:
  • Chapter XX-C (Section 269UD)
  • Section 142(2A) and 142(2D)
  • Section 281B
  • Section 44AB
  • Section 153A
  • Section 281
• Constitution of India:
  • Article 14
  • Article 226
• Indian Penal Code, 1860: Sections 193, 228, 196
• Code of Criminal Procedure, 1973: Section 195
• Banking Regulation Act, 1949: Section 45
• Gujarat Value Added Tax Act, 2003: Section 45
• Himachal Pradesh Goods and Services Tax Act: Section 74
• Karnataka High Court Act, 1961: Section 4
• Circular No.CBEC-20/16/05/2021-GST/1552 dated 02.11.2021 (CBIC Circular)
• Agenda of 38th GST Council Meeting
• Para 35.2 of Minutes of 38th GST Council

Precedents Cited

• Samay Alloys India (P) Ltd., vs. State of Gujarat - (2022) SCC OnLine Guj 2595
• C.B. Gautham Vs. Union of India - 1992 (65) taxman 440 (SC) (also Charan Lal Sahu Vs. Union of India - AIR 1990 SC 1480)
• Sahara India (Firm) Vs. Commissioner of Income Tax - 2008(226)ELT 22(SC)
• K.I. Shephard Vs. Union of India - (1987) 4 SCC 431
• H.L. Trehan Vs. Union of India - (1989) 1 SCC 764
• A. K. Kraipak v. Union of India
• ITO v. Madnani Engineering Works Ltd
• Swadeshi Cotton Mills Co. Ltd. v. Union of India
• State of Orissa v. Dr. Miss Binapani Dei
• Canara Bank v. V. K. Awasthy - (2003) 4 SCC 557
• Union of India v. J. N. Sinha
• Mohinder Singh Gill v. Chief Election Commissioner
• Olga Tellis v. Bombay Municipal Corporation
• Rajesh Kumar (re: Section 142(2A) of IT Act)
• Xiaomi Technology India (P) Ltd. Vs DCIT - 2022(145) taxman.com 501 (Kar)
• Radha Krishan Industries v. State of Himachal Pradesh - 2021 (8) SCC 383
• Vishwanath Realtor v. State of Gujarat - 2015 SCC OnLine Guj 6564
• Auto and General Engineering Citizen Society Vs State of Andhra Pradesh - AIR 1988 AP 266
• State Bank of Patiala Vs. S.K. Sharma - (1996) 3 SCC 364
• Dee Vee Project Ltd Vs. Government of Maharashtra - 2022(135) taxman.com 189(Bom)
• Calcutta Discount co Ltd. Vs. ITO - 1961(41) ITR 191(SC)
• Century Metal Recycling Ltd vs. Union of India - 2019(367) ELT 3 (SC)
• CIT Vs. Kelvinator of India Limited - (2010) 2 SCC 723
• New Nalbandh trader Vs. State of Gujarat - 2022 (66) GSTL 334 (Guj)
• Rajanandini Metal LTD Vs. Union of India - 2022(64) GSTL 301(P&H)
• Parity Infotech Solutions (P) Ltd Vs Govt of National Capital Territory of Delhi - 2023(151) taxman.com 349(Del)
• Bright State Plastic Industries vs Addl. Commr of Sales Tax (Appeal) - 2022(57) GSTL 226 (Ori)
• Arhaan Ferrous and Non-Ferrous Solutions (P) Ltd, vs Deputy Assistant Commissioner-1 (ST) - 2023(9) Centax 171(AP)
• State of Maharashtra vs Suresh Trading Company - (1997) 11 SCC 378
• On Quest Merchandising India India Pvt.Ltd, vs. Government of NCT of Delhi - (2018) 10 GSTL 182(Del)
• Sanchita Kundu vs. Asst. Commissioner of State Tax - 2022(63) GSTL 413 (Cal)
• LGW Industries Ltd vs Union of India [in WPA No.23512/2019(Cal)]
• Vodafone International Holdings BV vs Union of India - (2012) 6 SCC 613
• Commissioner of Central Excise Vs. Kay Kay Industries - (2013) 295 ELT 177
• M/s.DY Beathel Enterprises Vs state Tax Officer - 2022(58) GSTL 269 (Mad)
• Suncraft Energy Pvt Ltd vs.AC - State Tax - 2023(9) Centax 48 (Cal)
• Collector of Central Excise vs. Dai Inchi Karkaria Ltd - 1999(112) ELT 353 (SC)
• Eicher Motors vs Union of India - 1999 (106) ELT 3 (SC)