Blog No. 46: Blocking of Electronic Credit Ledger – Legal Principles for interpreting this Rule

These days the authorities are generally resorting to the tendency of blocking the balance lying in Electronic Credit Ledger (“ECL”, in short) merely on a vague premise of the view formed to protect the government revenue. Recently, in a challenge made before Hon’ble Bombay High Court, the court laid down various principles for interpreting rule 86A and inter-alia held as under:

1. Blocking of credit ledger is not an attachment of property.
2. The dis-allowance under Rule 86A shall be restricted only to the extent of credit fraudulently or wrongly availed.
3. The officer must be satisfied that the blocking is necessary, and he shall record the reasons in writing for doing so.
4. This power has civil consequences. Therefore, it must be exercised fairly and reasonably following the principles of natural justice.
5. A post decisional hearing must be granted within a reasonable period which may not be beyond two weeks from the date of order blocking the credit.
6. A remedial hearing, followed by the confirmation or revocation of order is necessary.
7. The respondent no. 3 only recommended to block the ECL. However, respondent no. 1 surrendered her authority to the commands/dictates of superior authority and did not independently satisfy herself as to the existence of circumstances mandating to block the ECL. Therefore, the order is arbitrary and illegal.

Observing the above principles, the court held that blocking of ECL is bad in law as it neither record reasons in writing for doing so nor it mentioned the extent to which blocking is necessary. Read more about the case DEE VEE Projects Ltd Vs Govt of Maharashtra reported as MANU/MH/0455/2022

Facts of the Case

1. Petitioner is a regular taxpayer and filed the returns under GST law for the tax periods upto September 2020.
2. Till September 2020, petitioner availed the input tax credit (“ITC”, in short) for an amount of Rs. 48,79,61,446/-.
3. Suddenly on 01.07.2021, the balance lying in ECL of the petitioner was blocked by the proper officer, State Tax.
4. A representation was submitted on 02.07.2021 followed by reminder letter dated 14.07.2021.

Submissions of the Petitioner

5. Credit amount available in the ECL is the property of the petitioner and the blocking of the ECL of the petitioner amounts to illegal provisional attachment of the property of the petitioner under Section 83 of the CGST Act.
6. There is no proceeding pending under any of the sections specified in section 83.
7. There is no provision under CGST Act authorising to block the balance lying in ECL.
8. The power of blocking ECL cannot be exercised without quantifying the amount of wrong availment of credit in ECL as per the provisions of rule 86-A.
9. There is no order passed to the effect that upon consideration of some material before it, it was satisfied that there was fraudulent availment of the credit in ECL account or such credit was availed of even though the petitioner was not eligible for the same.
10. Even if there was any order, the blocking could have been only to the extent of the amount of credit determined to be fraudulently or wrongly availed and specifically stated therein.

Observations of the Court

11. In attachment of property, the custody of the property is, actually or symbolically, taken over by the department with a view to protect the property from being transferred or altered in character, so that it can be appropriated, if the need arises, for realising tax dues. But, in case of blocking of ECL under rule 86-A, the custody of the property remains with the tax prayer but disability is created on his capacity to utilise it or receive the refund of unutilised credit.
12. The disallowance can be done through blocking of the ECL to the extent of the amount fraudulently or wrongly shown as lying in credit in the ECL.
13. Any administrative power having quasi-judicial shades, which brings civil consequences for a person against whom it is exercised, must answer the test of reasonableness. It would mean that the power must be exercised fairly and reasonably by following the principles of natural justice. The twin requirements of this rule are that the officer must be satisfied that the blocking is necessary, and he shall record the reasons in writing for doing so.
14. Given the nature of power, above-stated twin requirements would not serve the purpose of settled principles of law. That requires something to be read which is not stated in the rule. Therefore, a post decisional hearing may be granted within a reasonable period of time which may not be beyond two weeks from the date of the order blocking the ECL. After such hearing is granted, the authority may proceed to confirm the order for such period as may be permissible under the rule or revoke the order, as the case may be.
15. A remedial hearing, followed by the confirmation or revocation of order is necessary.
16. Exercise of power under rule 86-A made by respondent no.1 was not because she was independently satisfied about the need for blocking the ECL but, was due to the fact that she felt compelled to obey the command of her superior. In other words, the order was passed virtually by respondent no.3. This is not the manner in which the law expects the power under rule 86-A to be exercised. When a thing is directed to be done in a particular manner, it must be done in that manner or not at all is the well established principle of administrative law (see Chandra Kishor Jha V/s. Mahavir Prasad, AIR 1999 SC 3558 and Dhananjay Reddy V/s. State of Karnataka, AIR 2001 SC 1512), which has not been followed here. This is one more reason for us to hold that the impugned order is arbitrary and illegal.

Therefore, the ECL is ordered to be unblocked.

 Download HC-Bom-2022-Dee Vee