GST: Restriction on utilization of ITC under Rule 86 A  of CGST cannot be more than one year, rules Delhi HC [Read Order]

The Delhi High Court (HC) has held that the restriction on utilization of the Input Tax Credit (ITC) under Rule 86 A of the Central Goods & Services Tax Rules, 2017 cannot be more than one year.

M/s Parity Infotech Solutions Pvt. Ltd, the petitioner challenged the instruction dated 08.03.2022 issued by Special Commissioner-V, Department of Trade and Taxes (Policy Branch) vide which instructions were issued to all the officers of DGST to survey all such cases where the input tax credit of a taxpayer has been blocked for over one year to scuttle the provisions of law that ITC cannot be blocked for more than one year.

The Input Tax Credit (‘ITC’) available in the petitioner’s Electronic Credit Ledger ( ‘ECL’) was blocked on 26.11.2020 under Rule 86A of the Central Goods & Services Tax Rules, 2017 (‘the Rules’). The respondents did not unblock the same immediately on the expiry of the period of one year. 

It was claimed by the petitioner that the said demand was created artificially with the object of denying the ITC, which would be available to the petitioner on the same being unblocked. The petitioner argued that the same was done under the impugned instructions, which are contrary to the law.  

Further challenged the action of blocking of electronic credit ledger without having any reasons to believe and also to thecontinuation of blocking of credit beyond the maximum period of one year. The petitioner had repeatedly approached the respondents for seeking reasons for blocking its ITC and had also enquired about the steps that it was required to take for unblocking the same.  However, the petitioner had received no satisfactory response.

Further, Petitioner challenged the impugned show cause notice as also impugned order passed by Respondent imposing demand without any independent application of mind and only based on the correspondence from the Central Tax Department.It was contended that the adjustment of the alleged demand by the Respondent by unblocking and utilizing the electronic credit ledger much before the period of 90 days as provided under the law.

The court observed that blocking of electronic credit ledger is a drastic step, and therefore it was necessary for the concerned officer to have some material to form a belief that the conditions under Rule 86A of the Rules are satisfied.It was viewed that any restriction under Section 86A will cease to have effect after the expiry of a period of one year from the date of imposition of such restriction.

A Coram comprising of Justice VibhuBakhru and Justice Amit Mahajan observed that a show cause notice under Section 74(1) of the CGST Act can be issued only where it appears to the proper officer that the tax has not been paid or short paid or erroneously refunded or where the ITC has been wrongly availed or utilised because of fraud, or any wilful-misstatement or suppression of facts to evade tax. 

The Court held that the impugned SCN as also impugned order were not in conformity with the provisions of S. 74 as the respondents had no material to form any independent opinion whatsoever, and proceeded mechanically to comply with the impugned instructions.

While allowing the appeal, the Court set aside the impugned show cause notice and impugned order. Further, the respondents are directed to forthwith restore the ITC appropriated under the demand created by the impugned order, to the ECL of the petitioner.

To Read the full text of the Order CLICK HERE

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