Blog No. 51: Blocking of electronic credit ledger with a negative balance is not allowed

CGST Act

—

CGST Rule

86A

 

The proper officer is empowered to block the unutilised balance lying in electronic credit ledger. In case there is no balance but he has reasons to believe that credit was fraudulently availed or was ineligible, he should invoke powers under section 73 or 74 of the GST Act, as the case may be, and shall issue a show cause notice. Having observed this, the Hon’ble Gujarat High Court held that proper officer cannot proceed to negatively block electronic credit ledger and ordered the respondents to refund the amount paid from cash ledger, to the extent of said negatively blocked ledger, for the purposes of filing return.

Read about the case [Samay Alloys India Pvt Ltd Vs State of Gujarat (2022)] below:

Facts of the Case

1. The balance in electronic credit ledger, as per petitioner, was Nil.
2. At the time of filing of return for September 2021, the petitioner noticed that there is a negative balance in electronic credit ledger.
3. As a result, pursuant to filing of return in Form GSTR-3B, the petitioner was made to pay liability through electronic cash ledger for an amount equivalent to negative balance entered in electronic credit ledger.
4. Petitioner asked reasons for negative balance entered in electronic credit ledger vide letter dated 22.10.2021 but not replied by the department.

Submissions of the Applicant

5. Negative block of electronic credit ledger is wholly without jurisdiction and beyond the scope of Rule 86A.
6. It amounts to recovery without adjudication.

Observations of the Court

7. The input tax credit available is the actual amount of credit lying in the ledger prior to its utilization/debit.
8. The condition precedent is that the input tax credit should be available in the electronic credit ledger before the power under Rule 86-A is invoked by the authority.
9. If no input tax credit was available in the ledger, the blocking of electronic credit ledger under Rule 86-A of the Rules and insertion of negative balance in the ledger would be wholly without jurisdiction and illegal.
10. In case where (i) Credit of input tax is not available in the electronic credit ledger or (ii) such credit has already been utilised, the powers conferred under Rule 86A cannot be invoked.
11. In case debit entries are made by the proper officer, the same will tantamount to permanent recovery of the input tax credit and certainly permanent recovery is governed by the statutory provisions (Section 73 of 74 of CGST Act) and it certainly travels beyond the plain language and underlined intent Rule 86A.
12. Once the input tax credit is claimed in electronic credit ledger, the credit becomes part of one fungible pool and the credit cannot be separately identified. Having regard to the same, the rule provides for restriction on an equivalent amount and not the credit itself. However, the rule presupposes existence of such credit in the electronic credit ledger.
13. We are not impressed with the submission of Mr. Sharma that the legislature has consciously used the expression “equivalent to such credit” instead of the words “equivalent to such “available” “credit”. The emphasis which is sought to be placed by Mr. Sharma is on the non-usage of word “available”. In our opinion, the expression “equivalent to such credit” necessarily implies the available credit. The absence of the word “available” would not make any difference.
14. The writ applicants are also entitled to the refund of ₹ 20 Lakh deposited by them to enable them to file their return.

Paksh Remarks

15. This is one of the important judgments on interpretation of Rule 86A.
16. Seeing a widespread trend of blocking the balance lying in electronic credit ledger, the courts have been vigilant to pass detailed and reasoned orders.
17. As per this decision, the credit ledger can be blocked only if there is some unutilised balance, and such blocking can be done to the extent of said available balance. In case there is shortfall, the officer shall proceed with issuance of show cause notice, adjudication of the case in terms of section 73/74, as the case may be.