Dept. allowed to block credit even if there is no positive credit in the electronic credit ledger when order passed under rule 86A: Allahabad HC

Case details: R.M. Dairy Products LLP v. State of Uttar Pradesh - [2021] 129 taxmann.com 37 (Allahabad)

Judiciary and Counsel Details

• • Naheed ARA Moonis and Saumitra Dayal Singh, JJ.
  • Nishant Mishra and Yashonidhi Shukla for the Petitioner.

Facts of the Case

The department blocked the credit of the petitioner and the petitioner filed writ petition challenging the blocking of credit. It submitted that had no jurisdiction or authority to block any input tax credit over and above any amount that may have been actually available on the date of the order. It was also submitted that input tax credit in dispute arose on account of the purchases made by the petitioner from one supplier and in respect of that supplier, adjudication proceedings were underway against the petitioner. Till those proceedings were concluded, no amount would become recoverable from the petitioner and, therefore, the order passed under Rule 86A of CGST Rules to block credit was wholly premature.

High Court Held

The Honorable High Court observed that the Rule does not contemplate any recovery of tax due from an assessee. It only provides, in certain situations and upon certain conditions being fulfilled, specified amount may be held back and be not allowed to be utilized by the assessee towards discharge of its liabilities on the outward tax or towards refund. It creates a lien without actual recovery being made or attempted. In the present case, the department alleged the fraudulent utilization of input tax credit since the supplier of petitioner was found to be non-existent at the disclosed place of business and their existed ‘reason to believe’ with the department that the petitioner had fraudulently availed credit.

Moreover, the rule only enables the authorized officer to not allow debit of an amount equivalent to ‘such credit’. To that effect, the legislature has chosen the words ‘not allow debit’. Thus, the provision of Rule 86-A is not a recovery provision but only a provision to secure the interest of revenue. Therefore, if there is no positive credit standing in the electronic credit ledger on the date of the order, passed under Rule 86-A, that order would be read to create a lien upto limit specified in the order passed as per Rule 86-A of the Rules. As and when the credit entries arise, the lien would attach to those credit entries up to the limit set by the order passed under Rule 86-A of the Rules. The debit entry recorded in the electronic credit ledger would be read accordingly and the petition would be dismissed.