The petitioner/assessee is a public limited company, engaged in the manufacturing of copper wire rod and submersible winding wire. As per the petitioner, the department/respondents blocked Input Tax Credit amounting to Rs.1.9 Crore lying in the Electronic Credit Ledger. The petitioner filed representations objecting to the action of the respondents.

The petitioner submitted that, as per the order, the basis for initiating action against the petitioner is a communication received from the Delhi North Commissionerate. As per the communication, one of the suppliers of the petitioner was found to be non-existing. The Show Cause Notice for cancellation of registration was issued to the supplier, which was, however, dropped. The suspension of registration of the supplier was revoked by the communication. Once the very basis of the proceeding against the petitioner has been withdrawn by the respondents themselves. There was no reason to block the Input Tax Credit of the petitioner.

The petitioner contended that the intent and purport of Rule 86A of the CGST Rules, 2017 is to secure the interest of revenue and that it is a sort of preventive measure. The petitioner is a running manufacturing unit having a turn-over running into multiple crores, thus there is no possibility of flying by night. The interest of revenue is always secured. The misappropriation or fraud, if any, has been committed by suppliers of the petitioner, for which the petitioner cannot be deprived of his valuable right of ITC. The denial of ITC is violative of Article 19(1)(g) and Article 21 of the Constitution of India.

The department contended that though the proceedings against the supplier were dropped, the proceedings against the supplier were again initiated and the GSTIN was cancelled.

The department submitted that an Intelligence Report was received from CIU, CGST-Vadodara Zone, which forms the basis of the investigation against the petitioner as well as the blocking of its ITC under Rule 86A of the CGST Rules, 2017. The petitioner had received ITC from seven different suppliers, who were part of a chain/racket involved in the generation and passing on of fake ITC without any inward supply at root level. As per the intelligence report, the petitioner was one of the beneficiaries of ineligible ITC from the chain/racket. The petitioner alone has received ITC worth Rs. 52.79 crores from seven suppliers in the chain/racket, including ITC worth Rs. 10.72 crores received from the supplier.

The provisions of Rule 86A of the CGST Rules are exercised where the prescribed officer has reason to believe that credit of input tax available in the Electronic Credit Ledger has been fraudulently availed or the assessee is ineligible. The prescribed authority’s exercise was subject to a satisfaction recorded by the authority.opinion to the effect that the credit ledger has been fraudulently availed or the assessee is ineligible in the situations as prescribed under the Rule itself.