Case Title, Court & Citation
M/s Parity Infotech Solutions Pvt. Ltd. v. Government of NCT of Delhi & Ors., High Court of Delhi, W.P.(C) 7017/2022, decided on 07.03.2023
Category: Input Tax Credit – Rule 86A Blocking & Section 74 Proceedings
Relevant Law: Sections 70 & 74, CGST Act; Rule 86A, CGST Rules.
Facts (Paras 1–5, 4.1–4.10)
The petitioner’s Input Tax Credit of ₹27,88,200 was blocked on 26.11.2020 under Rule 86A without providing reasons (Paras 2–4.3). The blocking was triggered merely on a communication from the Central GST Commissionerate alleging fake invoice investigation involving other entities (Paras 17–19). Despite repeated emails and visits, the State GST authorities neither disclosed reasons nor unblocked ITC even after expiry of the statutory one-year period under Rule 86A(3) (Paras 2, 4.4–4.6).
On 28.02.2022 — just days before unblocking — respondent no. 4 issued a show cause notice under Section 74 alleging wrongful ITC availment, though the notice lacked particulars and even the personal hearing column was marked “NA” (Paras 4.7–4.8). On 30.03.2022, an order under Section 74 was passed raising a demand equal to the blocked ITC, and the same was immediately appropriated from the Electronic Credit Ledger upon unblocking (Paras 4.9–4.10).
Issues / Questions (Paras 7, 27–28)
-
Whether ITC blocking under Rule 86A was lawful when no tangible material existed to form “reason to believe”.
-
Whether the Section 74 SCN and order were valid when issued mechanically without independent satisfaction regarding fraud, wilful misstatement, or suppression.
-
Whether instructions dated 25.02.2022 directing creation of demand prior to unblocking ITC were ultra vires Rule 86A(3).
-
Whether the Department could continue blocking ITC beyond one year contrary to Rule 86A(3).
Court’s Observations (Paras 7–25, 29–37)
The Court held that Rule 86A permits ITC blocking only where the Commissioner/authorised officer forms “reason to believe” based on tangible material indicating fraudulent or ineligible credit (Paras 7–10). Drawing from jurisprudence on “reason to believe” under income-tax law (Paras 11–16), the Court emphasized that suspicion cannot substitute material.
Here, respondent no. 4 acted solely on a communication from the Central GST Commissionerate and possessed no independent material regarding fake invoices or wrongful ITC (Paras 17–21). Despite lacking jurisdiction over the investigation, the State GST officer blocked ITC mechanically and even failed to give reasons upon repeated inquiries (Paras 19–22).
The SCN under Section 74 merely reproduced statutory language without factual basis and was issued under pressure of departmental instructions to create demand before the ITC unblocked automatically after one year (Paras 23–25). This reflected non-application of mind and an illegal attempt to circumvent Rule 86A(3) (Paras 29–32).
The circular dated 25.02.2022 directing officers to issue SCNs and create demands in all cases where ITC remained blocked over one year was held contrary to law insofar as it mandated action irrespective of statutory pre-conditions (Paras 33–37).
Judgment / Verdict (Paras 38–42)
The High Court set aside:
-
the show cause notice dated 28.02.2022,
-
the order dated 30.03.2022 under Section 74, and
-
the instructions dated 25.02.2022 to the extent they allowed ITC blocking beyond one year or directed mechanical issuance of SCNs.
The Court directed restoration of ITC appropriated under the illegal demand (Para 40). It clarified that authorities are free to assess the petitioner’s liability in accordance with law but cannot bypass statutory safeguards (Para 41).
Summary of Cases Referred
| Case | Citation | Principle / Verdict |
|---|---|---|
| Sheo Nath Singh v. AAC | (1972) 3 SCC 234 | “Reason to believe” must be based on reasonable, not speculative, grounds (Para 11). |
| Lakhmani Mewal Das | (1976) 3 SCC 757 | “Reason to believe” ≠ “reason to suspect”; requires live link with material (Para 12). |
| Kelvinator of India Ltd. | (2010) 2 SCC 723 | Belief must stem from tangible material; no mechanical action (Para 13). |
| Techspan India Pvt. Ltd. | (2018) 6 SCC 685 | Reaffirmed Kelvinator; change of opinion impermissible (Para 13). |
| Chintoo Tomar | 2014 SCC OnLine Del 7544 | Formation of belief must be rational and coherent (Para 14). |
| Radha Krishan Industries | (2021) 6 SCC 771 | Even “opinion” under Section 83 must be based on tangible material with live link (Para 16). |
Between the Fine Lines – Practical Takeaways for Trade
This judgment reiterates that ITC cannot be blocked or appropriated merely because another authority raises suspicion. Rule 86A powers are exceptional and require officers to possess concrete evidence of ineligible or fraudulent credit. Any attempt to create demands solely to prevent automatic unblocking after one year is unconstitutional. Taxpayers may challenge mechanical SCNs issued without particulars or without officer’s independent “reason to believe”.
Disclaimer – “The above summary is for academic purpose only; not formal legal opinion. Seek professional opinion before application. Author or publisher or website shall not be responsible for any usage in any form.”
