the essay of 16 February 2022 · the untouched capture
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<font color="#330066" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>FEBRUARY 16, 2022</strong></font>
<div align="center"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Allow the goose to lay eggs </strong></font>
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<p align="center"><u><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>By Vijay Kumar</strong></font></u></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</STRONG> Finance Minister in his Budget speech of February 28, 1986 stated:</font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">- An important item in our agenda for 1986-87 is to initiate reform in the system of indirect taxes. </font></p>
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<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">- In excise taxation a vexatious question which has been often encountered is the taxation of inputs and the cascading effect of this on the value of the final product. </font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">- This scheme, which has been referred as Modified Value Added Tax (MODVAT) scheme - I shall stress MODVAT, not MADVAT - allows the manufacturer to obtain instant and complete reimbursement of the excise duty paid on the components and raw materials. </font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">- MODVAT scheme provides a transparency which discloses the full taxation on the product and its introduction is an important measure of cost reduction. </font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">- Introduction of MODVAT will decrease the cost of the final product considerably through the availability of instant credit of the duties paid on the inputs and consequential reduction of interest costs. </font></p>
<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif">- It would be noticed that the MODVAT scheme avoids the payment of duties on earlier duties paid. </font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Somehow, the tax officials always felt that this kind of input credit given to tax payers is an unwarranted gift from the Parliament and as pujaris, it was their duty to deny as much credit as possible at all times to safeguard revenue. The methods adopted to collect revenue are comical, criminal, beyond logic and totally against all accepted economic principles.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Some years ago, officers used to walk off with the RG 23 (Modvat) account books of the assessees to prevent them from making debit entries so that they would pay tax in cash.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Technology has developed. Now there are no physical RG 23 books. The Credit book is online called Electronic Credit Ledger and so you need not walk away with the credit ledgers - you can actually freeze them in the cloud - virtually and the taxpayer is helpless as happened in this case before a high court.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">After commencement of GST regime, the petitioner regularly filed its returns till September 2020. Till that time, it had also availed of the credit available in its Electronic Credit Ledger (<em>"ECL"</em>) to the extent of Rs.48,79,61,446/- as permissible under law.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Operation of ECL went on smoothly till 1.7.2021.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The day of 1.7.2021 (the fourth anniversary of GST) came as a surprise for it when it noticed that its ECL was not operational and the portal showed that the ECL was blocked by the Deputy Commissioner. Blocking of the ECL had its own adverse impact on the functioning of the petitioner as the petitioner was unable to update its ECL, could not avail of the credit to discharge its liability to pay the CGST and could not file its returns.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The petitioner sent representation on 2.7.2021, protesting against the unlawful blocking of ECL and also sent a reminder on 14.7.2021 with a request to unblock the ECL.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Not being successful with the officials, the petitioner is before the High Court</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The High Court noted:</font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Rule 86-A has two pre-requisites to be fulfilled before the power of disallowing of debit of suitable amount to the Electronic Credit Ledger or blocking of ECL to the extent of the amount fraudulently or wrongly availed of is exercised.</font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">1. Competent Authority or the Commissioner being satisfied on the basis of material available before him that blocking of ECL for the afore-stated reasons is necessary. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">2. Recording the reasons in writing for such an exercise of the power.</font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Unless both these pre-requisites are fulfilled, the authority cannot disallow the debit of the amount to the ECL or cannot block the ECL even to the extent of amount found to be fraudulently or wrongly availed of.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The power under rule 86-A which in effect is the power to block ECL is drastic in nature. It creates a disability for the tax payer to avail of the credit in ECL for discharge of his tax liability, which he is otherwise entitled to avail. Therefore, all the requirements of rule 86-A would have to be fully complied with before the power thereunder is exercised. When this rule requires arriving at a subjective satisfaction which is evident from the use of words, <em>"must have reasons to believe,"</em> the satisfaction must be reached on the basis of some objective material available before the authority. It cannot be made on the flights of one's fancies or whims or imagination. The power under rule 86-A is an administrative power with quasi-judicial hues exhibited in the twin pre-requisites and has civil consequences for a tax payer in the sense, it acts as an obstruction to right of a tax payer to utilise the credit available in his ECL. Any administrative power having quasi-judicial shades, which brings civil consequences for a person against whom it is exercised, must answer the test of reasonableness. It would mean that the power must be exercised fairly and reasonably by following the principles of natural justice.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In the case of <em>Maneka Gandhi Vs. Union of India</em>, it was held that the principle of reasonableness which legally as well as philosophically, is an essential element of equity or non-arbitrariness and it pervades Article 14 like a brooding omnipresence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14. Fair and reasonable exercise of power would be there only when the power is exercised in the manner prescribed in the provision of law conferring the power and for the purpose for achievement of which it exists. This would underline the importance of existence of reasons to believe that there is fraudulent or erroneous availment of credit standing in the ECL. In other words, the power under rule 86-A cannot be exercised unless there is a subjective satisfaction made on the basis of objective material by the authority.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">As regards the following of principles of natural justice, the law is now well settled. In cases involving civil consequences, these principles would be required to be followed although, the width, amplitude and extent of their applicability may differ from case to case depending upon the nature of the power to be exercised and the speed with which the power is to be used.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The provisions made in rule 86-A would require the Competent Authority to first satisfy itself, on the basis of objective material, that there are reasons to believe that credit of input tax available in ECL has been fraudulently or wrongly utilised and secondly to record these reasons in writing before the order of disallowing debit of requisite amount to the ECL or requisite refund of unutilised credit, is passed or otherwise the order of blocking the ECL under rule 86-A would be unsustainable in the eye of law.</font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The High Court found that the impugned order is arbitrary and illegal and it was quashed and set aside.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The petitioner also sought issuance of direction to the Union of India for coming out with appropriate guidelines for exercise of the power available under rule 86-A.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The High court did not think that there was any need for the Court to issue a direction as desired by the petitioner. The High Court was of the opinion that rule 86-A has been adequately framed by the rule making authority so as to take care of any possible misuse of the power. The authority has ensured that sufficient safeguards against the misuse of power are embedded in rule 86-A itself and accordingly the rule has been framed.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">CBIC in its guidelines in <a href="https://taxindiaonline.com/RC2/notDesc.php?MpoQSrPnM=Mjg3MDQ=" target="_blank"><strong>CBEC-20/16/05/2021-GST</strong></a> dated 02.11.2021 emphasised,</font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><em>It is reiterated that the power of disallowing debit of amount from electronic credit ledger must not be exercised in a mechanical manner and careful examination of all the facts of the case is important to determine case(s) fit for exercising power under rule 86A. The remedy of disallowing debit of amount from electronic credit ledger being, by its very nature extraordinary, has to be resorted to with utmost circumspection and with maximum care and caution. It contemplates an objective determination based on intelligent care and evaluation as distinguished from a purely subjective consideration of suspicion. The reasons are to be on the basis of material evidence available or gathered in relation to fraudulent availment of input tax credit or ineligible input tax credit availed as per the conditions/grounds under sub-rule (1) of rule 86A. </em></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><em>As the restriction on debit of electronic credit ledger under sub-rule (1) of rule 86A is resorted to protect the interests of the revenue and the said action also has bearing on the working capital of the registered person, it should be endeavoured that in all such cases, the investigation and adjudication are completed at the earliest, well within the period of restriction, so that the due liability arising out of the same can be recovered from the said taxable person and the purpose of disallowing debit from electronic credit ledger is achieved.</em></font></p>
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<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Officers should remember that disallowing the use of debit from the Electronic Credit Ledger is, not another method of collecting revenue, but is sure to throttle the trade.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">What will you get if you throttle the geese that consistently, painfully and even inexplicably have been laying golden eggs for you?</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">You find somebody guilty and hang him - perfect, but do you throttle him just because you have a feeling that he is a criminal? Are you not killing the goose because you cannot wait till morning when it may lay an egg, that too a golden one? </font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Until Next Week </strong></font></p>
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