Show Cause Notice was issued to the taxpayer proposing a demand for recovery of certain sums of money, on the alleged ground of non-payment of IGST on ocean freight charges, wrong/excess availment of ITC, etc. Taxpayer had replied to the notice and had also made a representation. However, powers under Rule 86A were invoked and electronic credit ledger was blocked without communicating any order to the taxpayer for invoking the power as such.

Madras HC made the following observations:

• Power under rule 86A is a very drastic power conferred on the authority. Before invoking the power under Rule 86A, the authority should have reasons to believe that the credit of ITC available in the e-credit ledger has been fraudulently availed or the assessee is ineligible on account of any one of the contingencies in clauses (a) to (d) of rule 86A(1). That apart, the rule contemplates that the said authorities has to record the reasons in writing and not allowed to debit any amount equivalent to such credit in the credit ledger.

• Having reasons to believe and recording such reasons in writing is a pre-requisite and in the absence of any reason, which has been recorded, the invocation of power under rule 86A should be held to be unauthorized, illegal and without jurisdiction.

• The recorded reasons must be communicated to the assessee so as to enable him to put forth his objections and pray for release of blocking of e-credit ledger. Even if there is no such procedure provided for under rule 86A; we are required to read the principles of natural justice into the said Rule.

•  Applying the principles laid down by the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO reported in (2003) 259 ITR 19 (SC) the Madras HC stated that if the authority concerned has reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or the assessee is ineligible on any one of the grounds set out in the clauses from (a) to (d) of Rule 86A(1), then, 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 86A so as to make them ineligible for credit.

Writ Petition disposed of by directing the Revenue Authorities to communicate the reasons recorded in writing before invoking the powers under Rule 86A to the appellant, within a period of one week from the date of receipt of a copy of the order. On receipt of the same, the appellant is entitled to file his objections within a period of 3 days, thereafter, and on receipt of the objections, the concerned authorities shall pass an order and if the concerned authority is satisfied with the explanation may revoke the order passed under Rules 86A or otherwise pass a speaking order as to why the request made by the appellant cannot be complied with and communicate to the appellant within a period of 7 days, thereafter.

In such an event, it will be open to the appellant to question the said order in the manner known to law.