This article pertaining to “Understanding Rule 86A Of CGST Rules : In-built Safeguards” is written by CA. Rajeev K. Sharma. These days, in many States, ITC is being blocked without disclosure of reasons or adherence to due process. The article analyses Rule 86A, its limited legal grounds, and the statutory requirement of “reason to believe”. It highlights that CBIC guidelines mandate non-mechanical, evidence-based application of this exceptional power. Taxpayers have a right to seek disclosure of the basis and avail post-decisional personal hearing. Rule 86A, though stringent, contains in-built safeguards against arbitrary use—if properly followed.
Introduction
Rule 86A of Central Goods and Services Tax Rules, 2017 [CGST Rules] empowers the proper officer to not to allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilized amount if she has reason to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible as per the conditions specified in this rule.
In-built safeguards in Rule 86A
To exercise this power under Rule 86A, even issue of any show cause notice or intimation notice is not required. As such, ‘conditions’ upon which powers under rule 86A can be exercised and ‘how this power can be exercised’ are contained within this rule as due safeguards against arbitrary use of this power. Rule 86A reads as:
“86A. Conditions of use of amount available in electronic credit ledger.-
(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as
a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-
i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
ii. without receipt of goods or services or both; or
b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,
may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.
(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.
(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.”
Rule 86A based on ‘Reason to Believe’
A bare reading of this rule guides us that exercise of this severe power under rule 86A is based on this condition that there is “reason to believe”, and that it is pre-recorded.
‘Reasons to believe’ is explained by Honorable Apex Court in Dr Pratap Singh & Anr. v. ED AIR 1985 SC 989 as:
“the necessary intendment of the Legislature becomes revealed in that such drastic power of search and seizure without notice to the person affected, can be exercised, if the officer has reason to believe which must have its foundation on some material or grounds which must be stated in the search warrant itself or in a record anterior to the issuance of the search warrant so that when questioned the contemporaneous record would be available to the Court to examine the contention whether there was material for taking such drastic action or that the action was taken for extraneous or irrelevant reasons………The Court after referring to the decision of this Court in Commissioner of Commercial Taxes v. Ramakishan Shrikishan Jhaver [1966] ITR 664 held that the obligation to record in writing, the grounds of the belief as enjoined by section 165(1), if not complied with would vitiate the issuance of search warrant”.
Also honorable High Court of GUJARAT in New Nalbandh Traders Versus State Of Gujarat in Special Civil Application No. 17202 of 2021, in specific context of rule 86A in its directive words states,
“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 ‘basis’ is one or more of the 5 (five) reasons, without this ‘basis’ use of exceptional power under ule 86A would be contrary to law
Referring rule 86A, there are only five (5) reasons for which these pre-emptive and emergency powers can be invoked. And if there are any other reasons, not falling with these, use of this exceptional power would be contrary to law. Even passion to protect interests of Revenue does not authorize bypassing the law. Reliance is placed on the instructive words of Apex Court in Sakal Papers (P) Ltd & Ors. v. Uoi AIR 1962 SC 305 wherein it was held that:
“Legitimacy of the result intended to be achieved does not necessarily imply that every means to achieve it is permissible; for even if the end is desirable and permissible, the means employed must not transgress the limits laid down by the Constitution….”
If the amount of input tax credit is permitted to be blocked in a pre-emptive manner, when show cause notice is not even issued to make the taxpayer aware of the grounds of such pre-emptive action, it will raise questions about the legality of the use of authority vested in rule 86A of CGST Rules.
CBIC has specifically issued guidelines for taking action under rule 86-A. Readers may refer to these guidelines issued vide CBEC-20/16/2021-GST/1552 dated 2 Nov 2021 which mandates the ‘limitations’ in the use of this exceptional power. More particularly para 3.1.2 thereof, which reads as:
“3.1.2 Perusal of the rule makes it clear that the Commissioner, or an officer authorised by him, not below the rank of Assistant Commissioner, must have “reasons to believe” that credit of input tax available in the electronic credit ledger is either ineligible or has been fraudulently availed by the registered person, before disallowing the debit of amount from electronic credit ledger of the said registered person under rule 86A. The reasons for such belief must be based only on one or more of the following grounds:
a) The credit is availed by the registered person on the invoices or debit notes issued by a supplier, who is found to be non-existent or is found not to be conducting any business from the place declared in registration.
b) The credit is availed by the registered person on invoices or debit notes, without actually receiving any goods or services or both.
c) The credit is availed by the registered person on invoices or debit notes, the tax in respect of which has not been paid to the government’
d) The registered person claiming the credit is found to be non-existent or is found not to be conducting any business from the place declared in registration’
e) The credit is availed by the registered person without having any invoice or debit note or any other valid document for it.”
Thus, it is the pre-requisite in the law that there should be some ‘basis’ on which the said amount of input tax credit is blocked under rule 86A of CGST Rules. And in the absence of valid basis, it would be illegal use of authority to deny input tax credit that is claimed in accordance with law.
It is a Right available with taxpayer to demand disclosure of such ‘basis’
It is within their rights of the taxpayer to demand such ‘basis’. Not only as a matter of right but also as a pre-requisite, if the taxpayer wants to knock at the doors of the Court seeking relief in Writ, it will not be allowed if this action to ‘ask’ for the ‘basis’ is not taken by taxpayer before approaching the Court. Reliance is placed on the decision in CIT v. Scindia Steam Navigation Co. Ltd. (1962) 1 SCR 788, where Apex Court has held that:
“…it is well settled that no mandamus will be issued unless the applicant had made a distinct demand on the appropriate authorities for the very reliefs which he seeks to enforce by mandamus and that had been refused.”.
Taxpayer should demand for the disclosures of “the objective determination” of the need for such pre-emptive action when it appears that action under rule 86A is made in a “mechanical manner” contrary to the guidelines issued vide CBEC-20/16/2021-GST/1552 dated 2 Nov 2021. And, if response does not come to application demonstrating the ‘reasons to believe’ which form the ‘basis’ on which the exceptional and pre-emptive powers under rule 86A of CGST Rules have been invoked, it would be a blatant misapplication of law. Para 3.1.3 and 3.1.4 of the above guidelines refers, which read as:
“3.1.3 The Commissioner. or an officer authorised by him, not below the rank of Assistant commissioner, must form an opinion for disallowing debit of an amount from electronic credit ledger in respect of a registered person only after proper application of mind considering all the facts of the case, including the nature of prima facie fraudulently availed or ineligible input tax credit and whether the same is covered under the grounds mentioned in sub-rule (l) of rule 86A’ as discussed in para 3.1.2 above; the amount of input tax credit involved; and whether disallowing such debit of electronic credit ledger of a person is necessary for restricting him from utilizing/ passing on fraudulently availed or ineligible input tax credit to protect the interests of revenue.
3.1.4 It is reiterated that the power of disallowing debit of amount from electronic credit ledger must not be exercised in a mechanical manner and careful examination of all the facts of the case is important to determine case(s) fit for exercising power under rule 86A. The remedy of disallowing debit of amount from electronic credit ledger being, by its very nature, extraordinary, has to be resorted to with utmost circumspection and with maximum care and caution. It contemplates an objective determination based on intelligent care and evaluation as distinguished from a purely subjective consideration of suspicion. The reasons are to be on the basis of material evidence available or gathered in relation to fraudulent availment of input tax credit or ineligible input tax credit availed as per the conditions/grounds under sub-rule (1) of rule 86A.”
While the normal application of the rule contemplates the concerned parties be heard before the decision is given, Post-decisional hearings envisage that the parties are to be heard after the authority has reached its decision.
An Ask for the Personal Hearing
Exercise of powers under rule 86A does not require that a personal hearing is to be granted to concerned taxpayer whose credit is to be blocked , it does not even required to pre-inform her. This rule also does not even specifically provide for grant of personal hearing after this action of blocking credit is taken by the officer but based upon the principles of natural justice, a post-decisional personal hearing is to be granted to the person affected after the credit is blocked. Taxpayer must ask for and avail this opportunity of personal hearing to present her defence. And now, it will for the proper officer either to confirm the order under rule 86A or revoke the order.
Conclusion
Though it might seem that Rule 86A is an unbridled power available with officers with no right of pre-decisional hearing available to the affected person, but it is not. This rule contains sufficient in-built safeguards to protect the interests of taxpayer. Happy Reading!
