EKALAVAYA

The New Born IDT GAN A

Rule 86A of the CGST Rules, 2017- is it really a case of

“No Brooding Omnipresence in the Sky”?
Whenever I read Rule 86A ibid., it could just relate to the popular phrase adopted by
Justice Holmes “No Brooding Omnipresence in this Sky” which if contextually understood
translates to a question “ Does this subject Rule be treated as a classic case of no
restraint on the power of the GST Authorities administering the collection of GST ?”

Although, ITC availment is argued to be a case of concession given in the

statute,utilisation of ITC is certainly a vested right of the taxpayer. The subject rule, like
a sudden gospel from the universe, straight away places a restraint on the utilisation of
ITC with a simple message “Your Credit to the tune of Rs.... is blocked for GSTIN....... as
per Rule 86A” leaving taxpayers in absolute state of limbo. Ekalvaya, being a disciple of
this GST Law,focuses on dicussing each concepts of Rule 86A of the CGST Rules,2017 as a
seperate series based on 30+ reported judgements on the said rule.

Concept:1 Whether communication of Reasons to be recorded in wirting

mandatory in case of blocking the utilization of ITC?
As we all are aware of draconian nature of Rule 86A of the CGST Rules, 2017. Perhaps,to
use some semantics, the said rule literally plunges a dagger into the palpated heart
of a taxpayer, especially when such Rule is invoked in an unheralded manner. Rule
86A ibid.,which is an apparent case of excessive delegation of power in absence of parent
legislation in existence (atleast till 1.10.2022), has the highest level of civil consequence
when such powers are aribitrarily invoked.

Twin Conditions of Rule 86A ibid.,

Rule 86A ibid.,(subject Rule) requires twin conditions and succint summary of such
conditions are as follows :
 Reasons to believe based on cogent material from the competent Authority.
 Recording of such reasons in writing.

CA P Ashwin Kumaar
EKALAVAYA
The New Born IDT GAN A

However, the said subject rule is silent on three aspects:

 How to record such reasons in writing (whether specific order required to be
assigned or not)
 Whether communication of such reasons recorded is it must to a taxpayer?
 If such communcation is required, when to communicate such reasons before
blocking or after blocking ?

Out of the above three, second & third question assumes utmost significance.
Communication of Reasons Recorded in writing is sin qua non. It is the bare mininmum
principle of natural justice to record the reasons and communicate the same to the
affected party so that the affected party is given a chance to defend his case by
placing appropriate submissions.

Opportunity to Taxpayer - on Remedial Basis:

Although urge to protect the interest of the revenue is glarringly palpable on perusing the
subject Rule, the said Rule cannot disregard in entirity the Principles of Natural Justice.
Giving an opportunity for a tax payer atleast on remedial basis or post decisional basis is
what the courts have consistently held on this matter.

Let us peruse some of the seminal judgments on this matter:

HEC India LLP Vs Commissioner of GST & Central Excise AUDIT-II, COMMISSIONERATE,
CHENNAI ASSISTANT / DEPUTY COMMISSIONER OF GST & CENTRAL EXCISE, CHENNAI
2021-VIL-687-MAD dated 16-09-2021
“The authority, after recording the reasons may not allow to debit of any amount
equivalent to such credit in the electronic credit ledger. But, after doing so, the
authority is bound to communicate the reasons, which weighed in his mind to pass
such an order and not allow credit of any amount equivalent to such credit in the
electronic credit ledger. On receipt of such reasons, the assessee is entitled to put forth
his submission/objection requesting for lifting of such order and establishing a case that
there has not been any fraudulent availment of credit or the assessee would not fall
within anyone of the contingencies mentioned in clauses (a) to (d) of Rule 86-A(1) so as to
make them ineligible for the credit.”

CA P Ashwin Kumaar
EKALAVAYA
The New Born IDT GAN A

The another locus classicus is to refer to the Decision of Hon’ble Gujarat High Court in
the case of M/s. New Nalbandh Traders vs State of Gujarat & 2 others 2022-VIL-217-
GUJ dated 23-02-2022

“Of course, in order to guard against arbitrary exercise of power, the rule creates certain
checks which are found in the twin requirements explained by us earlier. But, in our
view, that may not be enough, given the nature of power, and what settled principles of
law tell us in the matter. They would, in such a case, require this Court to read into the
provisions of rule 86-A something not expressly stated therein, and so, we find that post
decisional or remedial hearing would have to be granted to the person affected by
blocking of his ECL. We may add that such 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.”
Note: Said Case has been relied upon in the following similar decisions
K-9-ENTERPRISES & KWALITY METALS Vs THE STATE OF KAR 2023-VIL-484-KAR [2023-07-27]
KINARAM VINTRADE P.Ltd Vs STATE OF WEST BENGAL 2022-VIL-463-CAL [30-06-2022]
Thus, right to know the reasons behind an administrative order having civil
consequences is a well embedded principle forming part of “Doctrine of Fair
Play” which runs like a thread through the warp and weft of the fabric of
our Constitutional order made up by Articles 14 and 21 of the Constitution
of India.

Final Takeaway in Nutshell:

Thus, any order which brings to bear adverse consequences upon the person
against whom the order is passed, must disclose the reasons for it so that the
person affected thereby would know why he is being made to suffer or otherwise he
would not be able to seek appropriate redressal of his grievance arising from such
an order. Thus, based on the above jurisprudence, Eklavya would submit to every
taxpayer to get the “recorded reasons in writing” for blocking the utilisation of ITC.
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CA P Ashwin Kumaar