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Input Tax Credit Cannot be blocked for more than one year under rule 86A of CGST rules, 2017.

Recently in case of M/S PARITY INFOTECH SOLUTIONS PVT. LTD. Vs GOVERNMENT OF NATIONAL CAPITAL TERRITORY OF DELHI & ORS. [W.P.(C) 7017/2022 & CM No. 21510/2022] has held that restriction on utilization of ITC under Rule 86 A of CGST Rules, 2017 cannot be more than one year and before blocking the ITC reasons for blocking the ITC should be recorded in writing in terms of Rule 86A of CGST Rules.

 

In the present case, it is Delhi State GST Department had blocked the petitioner’s (i.e. M/S Parity Infotech Solutions Pvt. Ltd) ITC solely on the basis of a communication dated 24.07.2020 received from the Joint Commissioner, GST West Commissionerate, Central Tax.

In that communication in was mentioned that Commissionerate has initiated an investigation regarding the fake invoices and during the initial investigation, firms mentioned in the list annexed as Annexure A were found to be involved as beneficiaries and are within the jurisdiction of the GST Delhi East. The petitioner’s name is mentioned at serial no.13 of the said list. It was also mentioned that the taxable value involved is ₹1,54,90,000/- and the total tax to be paid by the party (the petitioner) is ₹27,88,200/-.

The Input Tax Credit (hereafter ‘ITC’) available in the petitioner’s Electronic Credit Ledger (hereafter ‘ECL’) was blocked on 26.11.2020 under Rule 86A of the Central Goods & Services Tax Rules, 2017

 

Petitioner, on becoming aware that ITC has been blocked, sent several letters and emails requesting for seeking information regarding reasons for blocking the credit and further enquiring as to how the same could be unblocked. But it did not receive any satisfactory response.

 

On 28.02.2022, State GST Department has issued the impugned show cause notice calling upon the petitioner to furnish a response along with supporting documents in support of its claim

The petitioner responded to the said show cause notice by a letter dated 27.03.2022. A few days later, on 30.03.2022, respondent no.4 issued the impugned order under Section 74 of the “GST Act, 2017” calling upon the petitioner to pay an amount of ₹27,88,200/-.

Immediately thereafter, the petitioner’s ECL reflected that the said amount, as demanded in terms of the impugned order, had been debited.

Aggrieved by the order of department, petitioner filed appealed before hon’ble Delhi High Court.

Delhi High Court in the instant case has hold that ITC of the taxpayers cannot continue to be blocked beyond a period of one year.

In instant case, it was also observed by the Hon’ble Delhi High Court that Blocking of the ITC effectively deprives the taxpayer of a valuable resource to discharge its liability and realise the value in monetary terms. Thus, undisputedly, the said action is a drastic step and it is necessary that all legislative checks and balances, enacted in respect of exercise of power to take such measures, are duly satisfied. it is necessary for the concerned officer (Commissioner or an officer authorized by him not below the rank of Assistant Commissioner) to record the reasons for blocking the ITC in writing.

The court also found  that the petitioner’s ITC was blocked on an allegation that the ITC availed was on account of fake invoices. However, the respondent, who had blocked the petitioner’s ITC, had no information as to the fake transactions and had proceeded solely on the basis of a directive issued by the Joint Commissioner, GST West Commissionerate, Central Tax. It is, thus, clear that State GST Department had no tangible material to form any belief that the ITC lying in the petitioner’s ECL was on account of any fake invoice; it had proceeded to take action solely on the basis of a direction issued by another authority.

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