BackgroundThe petitioner, Klassic Traders, a proprietary concern registered under GST, had ITC of Rs.43,18,514 available in its Electronic Credit Ledger (ECL). By order dated 06.06.2024, the Assistant Commissioner of Commercial Taxes, LGSTO-16, Bengaluru blocked the petitioner's ECL by invoking Rule 86A of the CGST Rules. No pre-decisional hearing was given to the petitioner before passing this order. The blocking order contained no independent reason to believe as to why the ECL needed to be blocked; it merely relied upon Enforcement authority reports stating that a registered supplier was found non-existent or not conducting business from its registered place. No independent application of mind was applied by the blocking authority. The petitioner challenged the blocking order by way of a writ petition before the Karnataka High Court seeking quashing of the order and unblocking of ITC, and also sought a declaration that Rule 86A is ultra vires Section 16(2) of the CGST Act. Court Observations (Verbatim / Near-Verbatim)"In the instant case, since no pre-decisional hearing was provided/granted by the respondents before passing the impugned order, coupled with the fact that the impugned order invoking Section 86A of the CGST Rules by blocking of the Electronic credit ledger of the petitioner does not contain independent or cogent reasons to believe except by placing reliance upon the reports of Enforcement authority which is impermissible in law, since the same is on borrowed satisfaction as held by the Hon'ble Division Bench of this Court, the impugned order deserves to be quashed.""It is also pertinent to note that in the impugned order except stating that 'a registered supplier who has been found to be non-existent or not to be conducting business from his place of registration', no other reasons are forthcoming in the impugned order. On this ground also, the impugned order dated 06.06.2024 deserves to be quashed."The Court further relied upon and reproduced the binding ratio from K-9-Enterprises (Division Bench), including:"The expression 'reason to believe' would necessarily mean that the respondents must arrive at a satisfaction based on their own independent inquiry and not upon borrowed inquiry.""A bonafide purchaser cannot be denied ITC on account of a supplier's default and the recipient cannot be made to suffer denial of ITC for the wrong doings of the supplier.""The impugned orders are bald, vague, cryptic, laconic, unreasoned and non-speaking and deserve to be set aside." Final VerdictThe writ petition was allowed. The blocking order dated 06.06.2024 was quashed. The respondents were directed to immediately unblock the ECL of the petitioner upon receipt of the order to enable filing of returns forthwith. Liberty was reserved to the respondents to proceed against the petitioner in accordance with law and in terms of the Division Bench judgment in K-9-Enterprises. 👍 

BackgroundThe appellants — GST-registered businesses dealing in lead, lead scrap and allied goods — had availed Input Tax Credit (ITC) on purchases from GST-registered suppliers, which stood credited in their Electronic Credit Ledgers (ECL). The tax authorities, acting on a field visit report of the Assistant State Tax Officer, Vasco-da-Gama, Goa (an officer from another jurisdiction), which found certain suppliers to be non-existent or not conducting business from their registered place, issued orders dated 27.06.2023 blocking the ECL of the appellants by invoking Rule 86A of the CGST Rules, 2017. No pre-decisional hearing was granted to the appellants before blocking the ECL. The appellants challenged these orders before the Single Judge by way of writ petitions, which were disposed of rejecting the appellants' contentions. Aggrieved, the appellants filed the present intra-court writ appeals before the Division Bench. Court Observations (Verbatim / Near-Verbatim)On Pre-Decisional Hearing (Point No. 1):"Though Rule 86A does not expressly/specifically provide for adherence to principles of natural justice, the same would necessarily have to be read into Rule 86A and complied with while invoking the said provision.""When the ECL of the appellants was sought to be blocked and such credit cannot be utilised for upto 1 year, the said blocking would entail and result in serious civil consequences for the appellants warranting compliance with the principles of natural justice and providing an opportunity of hearing to the appellants.""Ordinarily, a post-decisional hearing is not a substitute for pre-decisional hearing and that pre-decisional hearing is important especially when the respondents-revenue passed the impugned orders which would entail and visit the appellants with serious civil consequences.""It was not physically possible for the appellants to immediately/forthwith encash/withdraw the ITC available in its ECL so as to warrant emergent/urgent blocking of the ECL without providing a pre-decisional hearing to the appellants.""Respondents-revenue committed a grave and serious error/illegality/infirmity in not providing/granting a pre-decisional hearing to the Appellant before passing the impugned order blocking its Electronic Credit Ledger under Rule 86A of the CGST Rules."On 'Reasons to Believe' and Independent Application of Mind (Point No. 2):"Rule 86A, which in effect is the power to block ECL is drastic in nature which creates a disability for the taxpayer to avail of the credit in ECL for discharge of his tax liability which he is otherwise entitled to avail and therefore, all the requirements of Rule 86A would have to be fully complied with before the power thereunder is exercised; when this Rule requires arriving at a subjective satisfaction which is evident from the use of words, 'must have reasons to believe', the satisfaction must be reached on the basis of some objective material available before the authority and cannot be made on the flights of ones fancies or whims or caprices.""The electronic credit ledgers have been blocked solely on the basis of communication from another officer [Field visit report by the Asst. State Tax Officer, Vasco-D-Gama, (Goa)]. There was no tangible material to form any belief that the ITC lying in the appellants' ECL was on account of any fake invoice; it had proceeded to take action solely on the basis of a direction issued by another authority.""The impugned orders have been passed based on the communication received from other officers, without any independent application of mind. This shows that exercise of power under Rule 86A was not because he was independently satisfied about the need for blocking the ECL but, was due to the fact that he felt compelled to obey the command of another officer.""The impugned order discloses that the same has been passed mechanically and is based on borrowed satisfaction and does not meet the test of formation of an opinion... the impugned orders are bald, vague, cryptic, laconic, unreasoned and non-speaking and deserve to be set aside.""It is quite possible that the transaction, when entered into in 2017 or 2018 could be genuine and when the officer visits in 2020 or 2021, the business could have been closed and therefore the mere closure of business in 2020 or 2021 cannot be a basis for denying credit availed earlier.""A bonafide purchaser cannot be denied ITC on account of a supplier's default and the recipient cannot be made to suffer denial of ITC for the wrong doings of the supplier." Final VerdictAll six writ appeals were allowed. The common order of the Single Judge dated 27.07.2023 and all the ECL blocking orders dated 27.06.2023 / 02.06.2023 were set aside and quashed. 👍  

BackgroundThe assessee is a registered dealer under the Karnataka Value Added Tax Act, 2003, engaged in the business of sale of textiles and readymade garments. The assessee purchased goods from registered dealers within the State, paid tax through account payee cheques, and issued tax invoices to buyers as required under Section 29 of the KVAT Act. The Audit Authority, upon audit of the books of accounts, rejected the returns and by order dated December 26, 2014 under Section 39(1) of the Act, disallowed the Input Tax Credit claimed by the assessee for the tax period September 2012 to March 2013, on the ground that certain selling dealers — namely M/s. Taksons, M/s. Jasky Exporters Pvt. Ltd., and M/s. Venus Printers — were suspected to be bogus dealers and had not remitted the tax to the Department. FactsThe assessee challenged the order of the Audit Authority before the Joint Commissioner of Commercial Taxes (Appeals), who dismissed the appeal by order dated October 30, 2015, upholding the re-assessment and penalty order. The assessee thereafter appealed to the Karnataka Appellate Tribunal (KAT), which by judgment dated August 21, 2017 allowed the appeal, set aside the orders of the authorities below, and restored the ITC claim of the assessee. The State of Karnataka filed the present revision petition before the High Court challenging the order of the KAT. The State contended that the Tribunal failed to appreciate that under the KVAT Act, only tax actually collected and discharged by the selling dealer is eligible to be availed as ITC by the purchasing dealer, and that the assessee failed to prove the genuineness of the transactions and that the selling dealers were not bogus. The assessee, on the other hand, maintained that it had made purchases supported by proper documentation including account payee cheques reflected in the invoices themselves, thereby fully discharging its burden under Section 71 of the Act, and that it cannot be made responsible for the failure of the selling dealer to remit tax. Court Observations (Verbatim — Crucial Extracts)"From perusal of these documents, it can safely be concluded that the transaction is not a bogus transaction or make believe transaction. Since M/s. Tallam Apparels is not a bogus dealer, as is evident from the documents produced by the assessee, dis-allowing of input tax is incorrect. There cannot be any dispute, that burden is cast on the assessee to establish the transaction to lay a claim for deduction of input tax by production of necessary documents. This Court is of the considered opinion that the assessee has discharged this burden by placing necessary documents referred to supra. The details of the account payee cheques mentioned in the invoice itself demonstrates that the amount is transferred from the assessee to the dealer through the Bank which fact establishes that the transaction is not a bogus transaction." — Para 12"In the case on hand, if M/s. Tallam Apparels has not remitted the tax to the Department, for which assessee cannot be penalized." — Para 13"Under the scheme of the Act, there is no power vested in the authority to proceed against the assessee for non-remittance of tax by his purchaser. This aspect of the matter has been rightly considered by the Karnataka Appellate Tribunal in the right perspective." — Para 14 Final VerdictThe High Court of Karnataka dismissed the State's revision petition and upheld the order of the Karnataka Appellate Tribunal. It was held that once the assessee had established the genuineness of purchases through proper documentation including account payee cheques, ITC could not be denied merely on the ground that the selling dealer had not remitted tax to the Department, as the assessee cannot be penalized for the default of the selling dealer.