Allahabad High Court dismisses writ challenging input tax credit recovery order

Allahabad High Court dismisses writ challenging input tax credit recovery order

The Court said Rule 86-A of CGST rules is not a recovery provision but only a provision to secure the interest of revenue

The Allahabad High Court dismissed the writ petition filed against the order passed under Rule 86A(1)(a)(i) of the State/Central Goods and Services Tax Rules, 2017 on the ground that Rule 86-A was not a recovery provision but only a provision to secure the interest of revenue authorities.

The matter titled M/s R M Dairy Products LLP v The State of UP And Ors was placed before a Division Bench of the High Court of Allahabad comprising of Justices Naheed Ara Moonis and Saumitra Dayal Singh.

The facts leading up to this petition were that the Respondent – Authority passed an order on 25 June 2021 against the Petitioner under Rule 86A(1)(a)(i) of the State/Central Goods and Services Tax Rules, 2017 (Rules). The Petitioner submitted that the Respondent had no jurisdiction or authority to block any input tax credit over and above any amount that may have been actually available on the date of the order. The Petitioner further contended that Rule 86A of the Rules obliged the Respondent to record a positive 'reason to believe' that credit of input tax had been fraudulently availed by the Petitioner or that the Petitioner was wholly ineligible to avail the same.

The Petitioner pointed out that another adjudication proceeding was underway against the Petitioner u/S 74 of the UP GST Act, 2017 and therefore, no amount would become recoverable from the Petitioner till those proceedings are concluded. Section 78 of the Act was also referred to by the Petitioner, which provides the manner and mode of recovery.

The Respondent – Authority vehemently opposed this writ petition and alleged fraudulent utilization of input tax credit by the Petitioner.

The bench noted Sections 74 and 78 of the Act. Section 74 of the Act provided for determination of input tax credit wrongly availed or utilized by reason of fraud, etc. through the process of adjudication while Section 78 further mandated that any amount that may be determined under Section 74 of the Act may not be recovered for a period of three months from the date of service of the adjudication order.

The Court after going through Rule 86A concluded that the Rule does not contemplate any recovery of tax due from an assessee but creates a lien without actual recovery being made or attempted. It also made certain observations with regards to some of its wordings:

• Input tax available – The words 'input tax available' have to be read only in the context of the infringement being alleged by the revenue, i.e. fraudulent availment or availment dehors eligibility to the same.

• Available – The word 'available' used in the first part of sub-Rules of Rule 86-A would always relate back in time when the assessee allegedly availed input tax credit either fraudulently or which he was not eligible to avail.

• Ineligible – The ambit of the word 'ineligible' was clarified by means of Rule 86-A (1)(a)(i) to include a transaction performed with a registered dealer who may be found to be non-existent or to have not conducted any business, etc.

The Court went through the impugned order, which revealed that it was the allegation of the revenue authorities that the Petitioner – M/s Darsh Dairy & Food Products, Agra was found to be non-existent at the disclosed place of business. Thus, the 'reason to believe' was based on material with the competent authority indicating the non-existence of the selling dealer.

The Court, therefore, could not deny the existence of the 'reason to believe' with the revenue authorities that the assessee had fraudulently availed or was ineligible to avail 'input tax credit' with respect to when the impugned order was passed. It was further observed by the Court that Rule 86A was at most a provision to secure the interest of revenue authorities, to be exercised in the presence of the relevant 'reasons to believe', as recorded and further made the observation as follows:

"The operative portion of sub-rule (1) of Rule 86-A limits the exercise of power (by the authorized officer), to the amount that would be sufficient to cover the input tax that, according to the revenue, had either been fraudulently availed or to which the assessee was not eligible (for). It is an amount equal to that amount which has to be kept unutilised."

The bench thus, illustrated that if the petitioner was to earn any further input tax credit in its electronic credit ledger to the tune of ₹7,06,66,700, the same would be retained by way of a lien in favour of the revenue authorities, so, however, that the revenue may not appropriate it under that Rule.

The Court dismissed the petition by concluding that the provision of Rule 86-A was not a recovery provision but only a provision to secure the interest of revenue.