The Punjab and Haryana High Court bench of Justices Tejinder Singh Dhindsa and Pankaj Jain has held that there should be reason to believe that petitioner is guilty of fraudulent transaction or is ineligible under Section 16 of the CGST Act for exercising power under Rule 86A of the CGST Rules and a speaking order has to be self-sustainable.

1. Petitioner : Rajnandini Metal Ltd.

2. Respondents : Union of India and others

3. Appeal Type/ No. : CWP No.26661 of 2021 (O&M)

4. CORAM : 1. HON'BLE Justices Tejinder Singh Dhindsa, 2. HON'BLE Justice Pankaj Jain

5. Council For Petitioners : Mr. Jagmohan Bansal, Senior Advocate assisted by Mr. Naveen Bindal, Advocate and Mr. Aman Garg, Advocate

6. Council For Respondents : Mr. Anshuman Chopra, Sr. Standing Counsel

7. Date of pronouncement : 31.05.2022

8. Facts : The petitioner, a Public Limited Company is engaged in manufacturing of copper wire rod and submersible winding wire and is registered under the Central Goods and Services Tax Act, 2017. As per the petitioner, respondents blocked Input Tax Credit amounting to Rs.1.9 Crore lying in Electronic Credit Ledger on 2nd of September, 2021. The petitioner filed representations objecting to such action of the respondents which remained undecided.

The petitioner was constrained to approach this court by way of CWP No.23917 of 2021 which was decided vide the following order dated 6th of December, 2021 :-

"We find that by this petition the petitioner is aggrieved of the action taken by the respondents in blocking the Input Tax Credit of the petitioner. We further find that by way of representation dated 10.11.2021 (Annexure P-14), the petitioner has raised a grievance before respondent No.2 and had objected to the blocking of the Input Tax Credit.

In the circumstances, we deem it appropriate to dispose of this petition with a direction to respondent No.2 to decide the said representation in accordance with law by passing a speaking order thereon within a period of seven days from the date of receipt of certified copy of this order.

Ordered accordingly. For this purpose, the petitioner is directed to appear before respondent No.2 on 10.12.2021 at 10:00 am or on any other date on which the said authority may require its appearance."

The petitioner submitted a detailed written submission on 10th of December, 2021 in support of his representation. Respondent vide order dated 17th December, 2021 rejected the representation of the petitioner seeking unblocking of its Input Tax Credit.

the petitioner submits that as per the impugned order the basis for initiating action against the petitioner is a communication received from Delhi North Commissionerate, as per which one of the suppliers of the petitioner is found to be non-existing. He submits that the said supplier is one M/s Bhagwati Metals.

He submits that Show Cause Notice for cancellation of registration was issued to M/s Bhagwati Metals on 5th February, 2021. The same was however dropped vide order dated 23rd February, 2021 and the suspension of registration of said M/s Bhagwati Metals was revoked by the said communication which is placed on record as Annexure P-20.

His contention is thus that once the very basis of proceeding against the petitioner stands withdrawn by the respondents themselves and that too on 23rd of February, 2021, there was no reason to block the Input Tax Credit of the petitioner in September, 2021 and, thus, the impugned order dated 17th of December, 2021 deserves to be set aside.

He further submits that the intent and purport of Rule 86A is to secure interest of revenue and it is sort of preventive measure. The petitioner is a running manufacturing unit having turn-over running into multiple Crores, thus there is no possibility of fly by night. The interest of revenue is always secured. The mis-appropriation or fraud, if any has been committed by suppliers of the petitioner for which petitioner cannot be deprived from his valuable right of ITC. The denial of ITC is violative of Article 19(1)(g) and Article 21 of the Constitution of India.

Ld. Senior Standing Counsel for the respondents contended that though the proceedings against M/s Bhagwati Metals initiated vide Show Cause Notice dated 5th of February, 2021 were dropped vide order dated 23rd February, 2021 (Annexure P-20) however, on 1st July, 2021, the proceedings against the said M/s Bhagwati Metals were again initiated and the GSTIN was thereafter cancelled on 27th of July, 2021.

He further submits that the reason for initiating proceedings against the petitioner has been clearly spelled out in Para No.4 of the additional affidavit filed today.

9. Nature of Issue : Conditions of use of amount available in electronic credit ledger

10. Industry : Not industry specific

11. Held : From bare perusal of the aforesaid provision, it is evident that the power under Rule 86A of the CGST Rules is exercised where the prescribed officer has reason to believe that credit of input tax available in the Electronic Credit Ledger has been fraudulently availed or the assessee is ineligible. The exercise vested in the prescribed Authority is subject to a satisfaction recorded by the said Authority and forming opinion to the effect that the Credit Ledger has been fraudulently availed or the assessee is ineligible in the situations as prescribed under the Rule itself.

Rule 86A undoubtedly could be said to have conferred drastic powers upon the proper officers if they have reason to believe that the activities or invoices are suspicious. The Rule 86A is based on "reason to believe". "Reason to believe" must have a rational connection with or relevant bearing on the formation of the belief. It is a subjective term and can be interpreted differently by different individuals."

The Hon'ble Court finds that the reason to invoke the power conferred under Rule 86A of CGST Rules against the petitioner is an intelligence report received from Principal Chief Commissioner, Central Excise and Central Tax, Vadodara Zone regarding a racket of firms indulging in fake judicial and passing of illicit ITC.

The Hon'ble Court observed that Merely by recording that some investigation is going-on a drastic far-reaching action under Rule 86A of the CGST Rules cannot be sustained. There is no reason recorded by the Authority for exercising power under Rule 86A of the CGST Act, 2017 which would show independent application of mind that can constitute reasons to believe which is sine qua non for exercising power under Rule 86A of the CGST Rules.

The court also observed that It is trite law that a speaking order has to be self-sustainable and respondents at this stage cannot be allowed to justify the same by adding reasons to it by filing additional affidavits. From the reading of the order it is evident that it is bereft of any material or 'reason to believe' that the petitioner is guilty of fraudulent transaction or is ineligible under Section 16 of the CGST Act.

Consequently, the present writ petition is allowed. The impugned order dated 17th December, 2021 (Annexure P-18) is set aside.

Needless to say that it shall be open to the respondents to proceed against the petitioner in case any incriminating material is found during investigation which can form basis of independent opinion as contemplated under the Act.

12. In favour of : Petitioner

13. Case Law Refereces : 1. M/s New Nalbandh Traders vs. State of Gujarat and 2 other' (R/Special Civil Application No.17202 of 2021

14. Relevant Act / Rules/ Forms : 1. Rule 86A of the CGST Rules

15. Database Citation : HC-GW-400-2022-PJ