IMPORTANT POINT
The court established that principles of natural justice must be observed in the application of Rule 86A of the CGST Rules, despite its silence on the matter.

ORDER :

(Sujoy Paul, J.)

Regard being had to the similitude of the questions involved on the joint request of the parties, the matters were analogously heard and decided by this common order.

Facts:-

2. The facts are taken from W.P.No.10390 of 2024. The petitioner is a proprietorship firm engaged in the manufacture and supply of zinc oxide and duly registered with Goods and Service Tax (GST) authorities of Telangana State. The petitioner claims itself as bona fide purchaser of inputs from various suppliers and has been receiving proper tax invoices, e-way bills and maintained weighment slips under the provisions of Central Goods and Service Tax (CGST) Act, 2017 (Act) and Telangana State Goods and Service Tax (SGST) Act, 2017.

3. It is submitted that on 14.03.2024, the State Tax Officer in purported exercise of power under Rule 86A i.e., Conditions of use of amount available in electronic credit ledger of the CGST Rules, 2017 (Rules), blocked the credit ledger of the petitioner by mentioning ‘Registration of supplier has been cancelled’. The ledger is blocked without issuing any show cause notice. No detailed reasons and necessary facts were disclosed, which became foundation for such blocking by the respondent. Because of the blocking, the electronic credit ledger reflects the closing balance as zero. This action of blocking is subject matter of challenge in these petitions filed under Article 226 of the Constitution.

Petitioners’ contention:

4. Sri M. Uma Shankar, learned counsel for the petitioners in W.P.Nos.10390, 10425 and 10459 of 2024, submits that in W.P.No.10390 of 2024, the respondents have issued notice to the petitioner therein and one of the suppliers under Sections 73/74 of the Act and the said proceeding is still pending. In all fairness, the department should have proceeded as per the said show cause notice and after following the procedure could have taken a final decision. Instead, the draconian Rule 86A is enforced, which resulted in total stoppage of business of the petitioner. The petitioner is not able to file his monthly return. If ultimately, the aforesaid action is found to be illegal, still the petitioner may be required to pay late fee, penalty etc., for the intervening period. Both the learned counsel for the petitioners placed reliance on two judgments of Telangana High Court passed in the case of M/s. Laxmi Fine Chem v. Assistant Commissioner, 2024 (5) TMI 509 and in the case of M/s. Sri Krishna Enterprises v. The Superintendent of Central Tax, 2023 (11) TMI 957, to bolster the submissions: (1) the impugned drastic action of blocking the electronic credit ledger is arbitrary and runs contrary to the principles of natural justice, more so, when it is taken without issuing show cause notice. (2) As per clause 3.1.3 of Circular No. CBEC-20/16/05/2021-GST/1552 dated 02.11.2021 issued by the Ministry of Finance, Department of Revenue, Central Board of Indirect Taxes and Customs, GST Policy Wing, Government of India, it is clear that the department itself was conscious that the power under Rule 86A cannot be exercised in routine manner, instead, it must be exercised sparingly and with utmost circumspection. (3) The point involved is no more res integra, as the Gujarat High Court in the case of Samay Alloys India Pvt. Ltd v. State of Gujarat, 2022 (2) TMI 843 has already considered the above draconian provision and set aside similar action. (4) The impugned document does not contain necessary details i.e., the details of the supplier whose registration is cancelled, the date when such cancellation has taken place etc. Therefore, there is no material whatsoever on the strength of which the ‘satisfaction’ is arrived at or in other words “reasons to believe” was recorded.

5. Sri M. Naga Deepak, learned counsel for the petitioner in W.P.No.12733 of 2024, submitted that the language employed in Rule 86A makes it clear that even if, the Input Tax Credit available in the e-credit ledger has been fraudulently availed o