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21 August 2021

To create a lien up to the limit specified in the Order passed under Rule 86A where there is no positive credit in the Electronic Credit Ledger as on the date of the order – High Court of Allahabad (Writ Tax No. 434 of 2021 dated July 15 2021)

Gist of the case:

Where there is no positive credit standing in the electronic credit ledger on the date of the order passed under rule 86A, the order would be read to create a lien up to the limit specified in the order passed as per rule 86A of the Rules.

As and when the credit entries arise, the lien would attach to those credit entries up to the limit set by the order passed under rule 86A. The debit entry recorded in the electronic credit ledger would be read accordingly.

Facts of the case:
  1. In the case of R.M. Dairy Products LLP vs State of Uttar Pradesh, the writ has been filed against the order passed under Rule 86A(1)(a)(i) of the CGST Act Rules’2017.
  2. The following submissions were made in the writ that was filed by the assessee:
  • Firstly, that the department has no authority to block any input tax credit over and above any amount that is actually available in the electronic credit ledger on the date the order is passed under Rule 86A.
  • Secondly, Rule 86A states that there should be 'reason to believe' that credit of input tax had been fraudulently availed by the assessee or the assessee was wholly ineligible to avail the same. Where the assessee has not committed any fraud and is eligible to avail the input tax credit, the action taken by the department is wholly without jurisdiction.
  • Thirdly, the input tax credit in dispute arose on account of the purchases made by the petitioner from M/s Darsh Dairy & Food Products, Agra with respect to which, adjudication proceedings are underway against the assessee in accordance with Section 74 of the UP GST Act, 2017. Till those proceedings are concluded, no amount would become recoverable from the assessee and, therefore, the order passed by the department under Rule 86A is wholly premature.
  1. The department passed the order under Rule 86A on the ground of fraudulent utilization of input tax credit. The department had reasons to believe that the input tax credit availed in relation to the purchases made by the assessee from M/s Darsh Dairy & Food products was ineligible as the seller i.e., M/s Darsh Dairy & Food products was found to be non-existent at the disclosed place of business.
Held:

It cannot be denied that, their exist 'reason to believe' with the department that the assessee had fraudulently availed or was ineligible to avail 'input tax credit' with respect to which the order was passed.

Further, Rule 86-A is not a recovery provision but only a provision to secure the interest of the department.

Adjustment or appropriation will arise only when the adjudication order attains finality or after lapse of three months from the date of it being passed if there is no stay granted in appeal etc. that too as a consequence of the recovery provisions but not under Rule 86-A of the Rules.

Therefore, the submission of the assessee that there is any violation of the principle of law is also incorrect.

Further, where there is no positive credit standing in the electronic credit ledger on the date of the order passed under Rule 86-A, the order would be read to create a lien up to limit specified in the order passed as per Rule 86-A of the Rules.

As and when the credit entries arise, the lien would attach to those credit entries up to the limit set by the order passed under Rule 86-A of the Rules. The debit entry recorded in the electronic credit ledger would be read accordingly.

Therefore, where the assessee earns a further credit, the department would be entitled to a lien up to the limit of Rs. 7,06,66,700.00/-. However, the same shall not be adjusted in favour of the department except in accordance with law, as discussed above. Any further credit that may arise over and above that amount would be allowed to be utilized without objection by the department.