I. INTRODUCTION

In Alfa Enterprise v. State of Gujarat, R/SCA No. 16698 of 2019, the Hon’ble HC observed that even with the assistance of the instructing officer, the Ld. AGP is unable to cite any legal provision that would allow the respondent authorities to block the credit. On such observation, vide order dated 01.10.2019, the Hon’ble HC directed the respondent authorities to unblock the credit available in the electronic credit ledger forthwith.

Alfa Enterprises (supra) attracted the attention of the department regarding the legal backing for blocking credit and hence the ‘legality of blocking credit’ was discussed in 38th GST Council Meeting held on 18.12.2019 in New Delhi. Wherein at para 35.2 of the MoM, the statement of Principal Commissioner, GST Policy Wing were expressed w.r.t. (i) hurdles regarding blocking of credit under Section 16 of the C/SGST Act and, (ii) issue discussed in great depth at the Officers’ Committee Meeting on 17.12.2019 to ensure uniformity and in the interest of revenue. It was proposed that the GST Council, as a measure of revenue augmentation, may approve the insertion of a new Rule 86A of the C/SGST Rules to block the utilisation of such credit (credit availed on fake invoicing). The said rule was proposed to prevent the registered person from utilizing the credit that was obtained on the fake invoices.

Following the above 38th GST Council Meeting, vide NN. 75/2019 dated 26.12.2019, the government inserted Rule 86A of the C/SGST Rules. It can be seen from the above, that the suggestions made by the Principal Commissioner, GST Policy Wing were with respect to ‘blocking of the utilization of credit availed with respect to fake invoices’. But, apart from fake invoicing, Rule 86(A) brought certain additional conditions of blocking credit such as (i) tax not paid (clause b) and, (ii) not in possession of the invoice (clause d). Rule 86A of the C/SGST Rules is reproduced herein for ease of reference

Rule 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.
[Emphasis Supplied for the Article]

It may be seen from Rule 86A of the C/SGST Rules that instead of the word ‘blocking of credit, the legislature has used ’not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for a claim of any refund of any unutilised amount’. It means that the legislature is shutting doors to allow to use of the availed credit for discharging tax liability or claiming a refund. For instance, if the registered person has availed INR 100/- on allegedly fake invoices then such INR 100/- would not be allowed to be used as credit to discharge tax liability or to be claimed as a refund.

II. ESSENTIAL INGREDIENTS TO INVOKE RULE 86A OF THE C/SGST ACT FOR NOT ALLOWING DEBIT OF AN AMOUNT EQUIVALENT TO AVAILABLE CREDIT IN ELECTRONIC CREDIT LEDGER

Authority – Commissioner or an officer authorised by him on this behalf, not below the rank of an Assistant Commissioner. As per the Guideline CBEC-20/16/05/2021-GST/1552 dated 02.11.2021, the Commissioner/Principal Commissioner may sanction the use of authorities under Rule 86A of the C/SGST Rules to prohibit the debit amount from the electronic credit ledger depending on the monetary restrictions listed below:

Total amount of ineligible or fraudulently availed input tax credit	Officer to disallow debit of amount from electronic credit ledger under Rule 86A
Not exceeding Rupees 1 crore	Deputy Commissioner/Assistant Commissioner
Above Rupees 1 crore but not exceeding Rs. 5 crore	Additional Commissioner/Joint Commissioner
Above Rs. 5 crore	Principal Commissioner/Commissioner

Reason to believe: Reason to believe must have a rational connection with or relevant bearing on the formation of the belief. There are a plethora of cases on ‘reason to believe’. Recently, in the case of Rule 86A of the C/SGST Rules, Hon’ble Gujarat and P&H HC have discussed reason to believe in New Nalbandh Traders v. State of Gujarat and Ors., R/SCA 17202 of 2021 and Rajnandini Metal Ltd v. Union of India and Ors., CWP No.26661 of 2021, respectively. As per the aforesaid guideline, “Reasons to believe” shall be duly recorded by the concerned officer *in writing on file**, before he proceeds to disallow debit of amount from electronic credit ledger ofthe said person*. It may be hoped that the concerned officers are making files recording the reasons to belief based on material evidence. May also refer GVPR Engineers Ltd. v. UOI, R/SCA No. 3842/2022 (Hon’ble Gujarat High Court); M/s North End Food Marketing Pvt. Ltd. v. State of U.P. and Ors., WTax No. 309 of 2021 (paras. 33 and 34 – Hon’ble Allahabad High Court); M/s S.S. Industries v. UOI, R/SCA No. 8163 of 2020 (para 32, 43, 45, 51 and 65 – Hon’ble Gujarat High Court)

The credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible: The credit which is fraudulently availed or ineligible will not be allowed to be debited for the purpose of Section 49 or filing of refund application. It is to be noted that ‘ineligible credit’ didn’t find its place in the 38th GST Council Meeting still it was inserted to disallow the usage of credit. In any case, if the credit is ineligible then it should be properly adjudicated under respective provisions and demand if any should be created. However, disallowing seemed to be the easy way out for the authorities. Will deal with the judgments of Hon’ble Allahabad and Calcutta High Court later but in the meanwhile, imagine the understanding of the word ‘available’. What possibly the word ‘available’ means here? Even when the purpose of the Rule is to disallow the usage of credit. When the department will disallow the usage, it means they are locking the doors. For instance, the credit ledger has INR 1,000 and the department invoked Rule 86A of the C/SGST Act, which means now the registered person cannot be allowed to use INR 1,000 for Section 49 or Refund Application (Period). That’s all !! In short, the department has locked in that amount for use as specified therein. Think – Can the department create liability in the guise of Rule 86A of the C/SGST Rules or set off future credit? Or the purpose is to merely lock in the ledger?

The followings are the conditions where Rule 86A of the C/SGST Act may be invoked:

Credit availed on the invoices/debit note issued by a non-existent company
Credit availed on the invoices/debit note without receipt of the goods/services.
Credit availed on the invoices debit note, wherein the tax of the invoices/debit note is not paid to the government.
The registered person availing credit is non-existent.
The registered person availing credit is not in possession of invoice/debit note.

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 a claim of any refund of any unutilised amount: (i) There should be a reason recorded in ‘writing’, in any fair legal system reason cannot be few words. The reason in writing should be brief but effective and that should be accompanied by documents relied upon for the allegation. Further, two situations are given where credit cannot be allowed to debit i.e., for discharging liability u/s. 49 of the C/SGST Act or for a claim of any refund of any unutilised amount.

III. DISALLOWANCE WILL BE EFFECTIVE TILL?

As per 86A(3) of the C/SGST Rules, the restriction of the use of credit will expire after a period of one year from the date of imposition of restriction. There are many Hon’ble HC’s orders directing the department to allow the debit (unblock the ledger) after the expiry of one year.

IV. DO REGISTERED PERSONS HAVE ANY REMEDY AGAINST THE DISALLOWANCE OF DEBIT OF THE AMOUNT IN THE CREDIT LEDGER?

It is unexpected that the CGST Act and Rules do not give taxpayers a recourse for the department’s discretion in deciding whether to unblock a taxpayer’s credit ledger. However, almost many Hon’ble High Courts have laid down the importance of giving a reasonable opportunity to the registered person by lodging their protest before the authorities. Even para 3.4.1 of the aforesaid guidelines gives the opportunity to the registered person to make submissions along with material evidence for allowing the debit of the credit.

V. WHETHER ANY ORDER SHOULD BE PASSED UNDER RULE 86A OF THE C/SGST RULES?

Rule 86A of the C/SGST Rules requires the authority in question to express an opinion, but it is silent on the passing of any particular orders outlining the grounds that are prima facie sufficient to invoke Rule 86A of the C/SGST Rules. Hon’ble HC had hinted the department to issue guidelines for passing the order under Rule 86A of the C/SGST Rules, in the case of M/s S.S. Industries v. UOI, R/SCA No. 8163 of 2020 (para 54 to 62 – Hon’ble Gujarat High Court) but unfortunately the same was not seen in the guidelines dated 02.11.2021.

VI. CBIC GUIDELINE – CBEC-20/16/05/2021-GST/1552 DATED 02.11.2021:

The CBIC has issued the aforestated guideline dated 02.11.2021 after various Hon’ble High Courts have observed that Rule 86A of the C/SGST Act has draconian power and was being utilized/misused by the authorities hence, there should be guidelines for the purpose of invoking Rule 86A. The guideline dated 02.11.2021 was expected to resolve various issues but horribly it has failed to do so. The guideline at various instances merely seems a reproduction of the provision. A few important pointers that the guideline has given are (i) Rule 86A of the C/SGST Rules should not be used in a mechanical manner and should be used as an extraordinary remedy to disallow the debit: 3.1.4, (ii) Reasons should be based on material evidence: 3.1.4., (iii) Reason to believe shall be recorded in writing in a file: 3.3.1 and, (iv) allowing debit of the credit on the submissions made by the registered person. Kerala has also issued the circular which may be looked at for state purposes, if required.

VII. HIGH COURTS TAKE ON BLOCKING AND CREATING NEGATIVE LIABILITY

The issue is whether the future credits can be set off or blocked under Rule 86A? Out there the argument regarding the department cannot block the ledger if NIL credit is wrong. The department can block the ledger if there is NIL credit but that’s it, the department cannot use the future credit to set off with the alleged liability created in the ledger. The real issue that was ought to be dealt with by various Courts was/is : Whether the department can setoff/block the future credit? And how future credit will be dealt with if the electronic credit ledger is not being utilised? For instance, if there is a credit lying in the almirah (kind of electronic credit ledger) then such credit can be blocked if they are availed as per the conditions laid down, but if the person avails other credit in future then the department is automatically taking such credit and putting them in the almirah on the grounds that it will be setoff against the credit fraudulently availed (as per their alleged order) because as on the date of disallowing it (available credit in the ledger) was not as much as in the alleged order.

Hon’ble Allahabad and Calcutta High Court have ruled the issue against the assessee and Hon’ble Gujarat High Court (Samay Alloys and various others) has ruled the issue in favour of the assessee. R.M. Dairy (Allahabad High Court) has created a lien under Rule 86A of the C/SGST Rules which will be used to set off future credit. How come a provision which is there to merely disallow becomes an attachment provision? Hon’ble Calcutta High Court has relied upon Hon’ble Allahabad High Court and given the finding on more or less on the same grounds. Below Hon’ble Calcutta High Court is discussed at length.

Basant Kumar Shaw v. Assistant Commissioner of Revenue and Others, MAT 976 of 2022: Hon’ble Calcutta High Court: At para no. 8 and 9 of the judgment, the Hon’ble HC has discussed the ‘availment’ of the credit. However, it is to be noted that Rule 86A of the C/SGST Rules is regarding ‘utilisation’. The argument from the petitioner was w.r.t. availment becoming vested right for utilisation. But the Hon’ble Court went a stage a previous and said availment is not the vested right, obviously, availment is based on conditions/restrictions but when the registered person has satisfied such conditions and restrictions then he/she avails the credit and such availed credit becomes the vested right. There are two stages i.e., availment and utilisation, availment is on the conditions/restrictions and thereafter, availed credits become vested right to utilize.

The Hon’ble HC read the Rule in its entirety to reach the correct interpretation. And interpreted the terms as, the word “available” is to be read in conjunction with the words “has been”, if done so, it clearly manifests that what was “available” in the electronic credit ledger at the relevant time has been fraudulently availed or is ineligible. As per the Hon’ble HC, ‘has been’ suggests that the word ‘available’ will relate back in time. But, ‘has been’ is first used with the input tax credit and then available, the purpose ‘has been’ is to relate to the fraudulent credit available in the ledger. For instance, INR 100/- is available, but by the evening only INR 50/- is available. And the department alleged only INR 70/- as fraudulent credit, then ‘has been’ means INR 70/- in total but for disallowance read with the word ‘available’ it will mean INR 50/-. ‘Has been’ read with the word ‘available’ cannot mean INR 100/-. Even if the alleged fraudulent credit is INR 100/- then also has ‘been’ with ‘available’ will only mean the remaining INR 50/-, and the department can disallow debit for such INR 50/- only.

VIII. THE AUTHORS TAKE:

Relevant Extract as – Rule 86A(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 …………. (*whatever condition*)………….. 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.

Available: It means as on date/time. For instance, in the morning Ms. J had INR 100/- and by the evening she spent INR 50/-. In the evening if someone asks how much money is available with her, then the answer will be INR 50/-. Because in the evening INR 50/- is available with her. But when interpretation will say that the word ‘available’ relates back in time then Ms. J will be having INR 100/-. But Ms. J shows her pocket it was only INR 50/-. Even then the meaning of the word ‘available’ will be called something which is related back in time. Ms. J is kafkaesque because her pocket has only INR 50/- but as per the interpretation she has INR 100/-.

Has been: It has to be read with the word ‘input tax credit’ and ‘available’. If the allegation is that the registered person has availed INR 100/- credit fraudulently and INR 50/- is available as of date, then the use of ‘has been’ indicates that INR 50/- is the part of the alleged availment and in that part which is still available will become subject matter for disallowing debit.

Such Credit: Such is used to refer to the previous things. When the provision uses such credit it means the ‘available credit’.

IX. THE ISSUES WITH RESPECT TO RULE 86A.

Many Hon’ble HC has accepted the fact that Rule 86A of the C/SGST Rules is not a recovery provision. But in practice, the department is recovering the credit using Rule 86A of the C/SGST Rules. For instance, if the alleged amount is INR 100, and as on the date of disallowance INR 50 is available then technically only INR 50 should get blocked and future credit should not be touched. Why does the author say future credit should not be touched? Because the future credit is not being alleged of being fraudulently or ineligible. If that is the case with the future credit then future credit cannot be disallowed (or blocked). But that is not happening in the practice, the future credit availed is being adjusted towards the negative liability created by the department. For instance, INR 100/- – alleged; INR 50/- available as on date; then there will be INR -50/- (minus fifty) liability in the ledger. Such INR -50/- (minus fifty) are used as fictional/deemed liability which is being adjusted by the credit availed in future. If the taxpayer gets INR 20/- as a credit after the disallowance date then such INR 20/- will be adjusted with INR -50 /- (minus fifty) and the net will be INR -30/- (minus thirty). To the best understanding of the author, it seems nothing but indirect recovery of the credit in the guise of Rule 86A.

X. CONCLUSION

There are cases pending which have challenged the constitutional validity of Rule 86A of the C/SGST Rules, this is a different subject matter which may be dealt with later. Coming back to blocking, the blocking isn’t the issue, the main issue is regarding the future credit. Can future credits be utilized ? If yes, how ? Can future credit be setoff against the negative liability created by the department ? If yes, then this doesn’t amount to recovery? The solution to this is to merely block the credit as of the date of disallowance and create a separate temp. ledger where the future credit may go (gets cumulated) and that credit may be utilized for the purposes of business. In this case, blocking the credit secures the interest of the revenue and separate temp. ledger will secure the interest of the business by having a little better operation. The law cannot be interpreted in a way to destroy the business and then come to the conclusion that the allegation was false. If there is an allegation then such allegation should be treated in a way where the revenue, as well as business interests, are protected. But right now, businesses are foregoing the credits (as those credits are getting set off) and bearing the entire cost of the tax. Such capital may or may not be dumped by every business, if the business cannot take the burden of tax while the ledger is blocked then such business will have no option other than to shut down. Imagine, after shutting business the registered person gets the clean chit that he/she has not availed the fraudulent credit. Now, what the registered person will do with the clean chit when the entire business came to a standstill merely based on an allegation?

The author is an advocate and tax practitioner and may be reached at abhishek@gstivy.in for any input/correction/comments.