M/S Steel Centre A Sole Proprietorship Concern Through Its Proprietor Rajkumar Gupta vs. Union Of INDIA Throgh Its Secretary

Held

The Court held that Rule 86A of the CGST Rules, 2017, is not unconstitutional. While the rule allows for immediate blocking of ITC based on reasons to believe, it incorporates a post-decisional hearing mechanism under sub-rule (2), where the Commissioner or authorized officer can allow the debit upon being satisfied that the conditions for disallowing debit no longer exist. The Court noted that the Karnataka High Court in K–9 Enterprises upheld the validity of the provision and directed compliance with natural justice principles. The Court reasoned that issuing a prior notice before blocking ITC could lead to the assessee availing the credit, making future recovery impossible. Therefore, the immediate action provision is justified. The Court directed the competent authority to decide on lifting the blocking, fully or partially, within 15 days, considering the petitioner's objection submitted under Rule 86A(2) and the adjudicated demand of Rs. 3,98,26,102/-. The issue of constitutional validity of Circular No. 04/2021 was not expressly decided.

Facts

The petitioner, M/s Steel Centre, challenged the constitutional validity of Rule 86A of the CGST Rules, 2017, and Circular No. 04/2021, along with the action of blocking its Input Tax Credit (ITC) amounting to Rs. 6.6 crore under Rule 86A. The petitioner had received multiple show-cause notices under Section 74 of the CGST Act for disallowing ITC transferred from various entities. The petitioner filed replies to these notices. The blocking of ITC was done without an explicit prior hearing, leading to a contention of violation of natural justice. The respondents argued that the action was taken strictly in accordance with Rule 86A and cited a Madras High Court judgment upholding the rule. The total demand adjudicated from five show-cause notices was Rs. 3,98,26,102/-.

Key Issues

1. Whether Rule 86A of the Central Goods & Service Tax Rules, 2017, is constitutionally valid, particularly concerning the principle of natural justice? (Question of law) 2. Whether the blocking of Input Tax Credit (ITC) under Rule 86A of the CGST Rules, 2017, without an explicit prior opportunity of hearing, violates the principles of natural justice? (Question of mixed law and fact) Petitioner's Arguments: - The action of blocking ITC was taken without providing an opportunity of hearing, violating the principle of natural justice, rendering the action bad in law. - Relied on the Karnataka High Court judgment in K–9 Enterprises v/s The State of Karnataka, which held that the principle of natural justice must be read into Rule 86A. Respondents' Arguments: - The action was taken strictly in accordance with Rule 86A and cannot be considered arbitrary or an excessive use of power. - Relied on the Madras High Court judgment in Tvl. Skanthaguru Innovations Private Limited v/s Commercial Tax Officer & Another, which upheld the action under Rule 86A.