The Gujarat High Court ruled that negative blocking of ITC is not allowed.
The writ applicant is a private limited company. The Company is engaged in the business of manufacture and sale of MS Billets. It is not in dispute that the Company is registered under the GST Act. At the relevant point of time when the writ applicants attempted to file their return for the month of September, 2021, there was no credit balance in the electronic credit ledger. Despite the same, the portal displayed a message that the electronic credit ledger had been blocked by the respondent. It was further noticed by the writ applicants that a negative balance had been entered in their electronic ledger by the respondent.
In such circumstances and as a result of such negative balance, if the writ applicants would file return for the month of September, 2021 by claiming input tax credit, the writ applicants would be required to pay an additional amount of output tax under the provisions of the GST Act to the extent of negative balance of the input tax credit in the electronic credit ledger.
Uchit Sheth, the counsel appearing for the writ applicants vehemently submitted that his clients were unable to file the return for the month of September, 2021 because of the negative block in the ledger. He submitted that his clients would immediately be liable to an additional amount of tax equivalent to the negative block even without any adjudication if they would proceed to file such a return.
He submitted that the negative block of electronic credit ledger with Nil balance in the credit ledger as on the date of the imposition of the block is wholly without jurisdiction and beyond the scope of Rule 86-A of the GST Rules.
Mr. Sheth argued that the sine-qua-non for the exercise of power under Rule 86A of the GST Rules is that there should be credit available in the electronic credit ledger which is alleged to be ineligible. In other words, the submission of Mr. Sheth is that if any credit balance is available, then the authority may, for reasons to be recorded in writing, not allow the debit of amount equivalent to such credit. However, there is no power of negative blocking for the credit to be availed in future.
On the other hand, the writ application has been vehemently opposed by Advocate Utkarsh Sharma, the AGP appearing for the respondent. He submitted that the action of blocking the electronic credit ledger of the writ applicants in exercise of powers under Rule 86-A of the Rules 2017 is in accordance with law and needs no interference.
The ITC is utilized in the sequence to set off the CGST liability.
Further, the ITC is utilized in the following sequence to set off the SGST liability.
Finally, the ITC is utilized in the sequence to set off the IGST liability.
Finally, the ITC standing under the SGST is used to set off the remaining IGST output liability. Furthermore, no set off is available between the CGST and SGST.
The division bench of Justice J. B. Pardiwala and Justice Nisha M. Thakore observed that Rule 86A (1) of CGST Rules, 2017 is broadly divided into two parts. The opening part of the rule deals with the conditions required to be fulfilled in order to invoke the powers under the rule. The second part of the rule provides for the consequences in case Rule 86A is invoked.
In other words, in case the conditions prescribed for the invocation of Rule 86A are not fulfilled, the officer cannot invoke the rule, and in such scenario, the consequences provided in the rule becomes ex-facie inapplicable.
One of the primary conditions in order to invoke Rule 86A is that the Credit of input tax should be available in the electronic credit ledger. Further, such credit should be claimed to have been (supported by reason to believe recorded in writing) fraudulently availed.
The court asked the respondents to withdraw the negative block of the electronic credit ledger at the earliest. We rule that the condition precedent for exercise of power under Rule 86A of the GST Rules is the availability of credit in the electronic credit ledger which is alleged to be ineligible. If credit balance is available, then the authority may, for reasons to be recorded in writing, not allow the debit of an amount equivalent to such credit. However, there is no power of negative block for credit to be availed in future. The writ applicants are also entitled to the refund of Rs.20 Lakh deposited by them to enable them to file their return. The respondents shall refund this amount of Rs.20 Lakh to the writ applicants within a period of two weeks from the date of the receipt of the writ of this order.
Case title: Samay Alloys India Pvt. Ltd. v/s State of Gujarat
Citation: R/SPECIAL CIVIL APPLICATION NO. 18059 of 2021