InW.P. No.104242/2023 -KAR HC-Taxpayers must be given post-decisional hearing before ITC is blocked under Rule 86A of CGST Rules: Karnataka High Court
Justice S. Vishwajith Shetty [27-07-2023]

Read Order: M/s K-9-Enterprises and Ors. V. The State of Karnataka &Ors

Chahat Varma

New Delhi, August 16, 2023: In a recent decision, the Karnataka High Court has held that that despite the absence of a specific provision for a personal hearing before issuing an order under Rule 86Aof the Central Goods and Services Tax Rules (CGST Rules), a post-decisional or remedial hearing must be granted to individuals or assesses affected by the blocking of their Input Tax Credit (ITC) in the electronic credit ledger.

The petitioners, M/s K-9-Enterprises and Ors., in this case, had assailed the orders passed by the Authority in blocking their ITC available in their electronic credit ledger by exercising the powers under Rule 86A of the CGST Rules.

The single-judge bench of S. Vishwajith Shettyemphasized that the invocation of Rule 86A necessitated two primary prerequisites. Firstly, there should be available input tax credit in the electronic credit ledger at the time of invoking the rule. Secondly, this credit should stem from fraudulent transactions. Without being fully convinced of a prima facie case, the competent authority cannot proceed with invoking Rule 86A.

The bench further noted that the available evidence suggested a prima facie concern that the Revenue had identified. As a result, an ongoing investigation was underway, prompting the competent authority to enact a preventive measure by suspending the ITC account of the petitioners. The bench concluded that the Authority seems to have fulfilled the two fundamental prerequisites necessary for invoking Rule 86A of the Rules.

However, the bench stated that that the court cannot overlook the fact that the power granted under Rule 86A of the Rules of 2017 holds significant implications. If this power is employed against an assessee, it deprives them of the ability to use the credit in their electronic credit ledger to fulfil their tax obligations, which they are otherwise entitled to use. As a result, the assessee would have to confront substantial civil consequences.

Thus, the bench concluded that considering the extent, applicability, and manner of power exercised by the competent authority under Rule 86A of the Rules of 2017, it might not be practical for the authority to conduct a standard pre-decisional hearing. Given that the order passed under Rule 86A is of a provisional nature, it would be reasonable to provide a post-decisional hearing to the petitioners, which aligns with the principles of natural justice. The bench stated that while a post-decisional hearing doesn't replace a pre-decisional hearing, it serves as an alternative in cases where a pre-decisional hearing could hinder the purpose of the statute. The outcome of an order under Rule 86A would result in the temporary withholding of input tax credit available in the electronic credit ledger for the petitioners. Nonetheless, the petitioners are still free to continue their business operations by paying the necessary tax amount into their account.

In light of the situation, the writ petitions were disposed of with the directive that the competent authority should provide the petitioners with a chance for a post-decisional hearing. The petitioners were allowed to submit their objections, along with relevant supporting documents and materials. Following the review of these submissions, the Court held that the competent authority must issue a well-reasoned order, in accordance with the provisions of Rule 86A of the Rules of 2017.