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Patna High Court: ITC Blocked Over Suspicious Supplier, Petitioner Told to Seek Remedy with Tax Authority

Patna High Court: ITC Blocked Over Suspicious Supplier, Petitioner Told to Seek Remedy with Tax Authority

This case involves M/s Graphic Trades Private Limited, which challenged the blocking of its Input Tax Credit (ITC) worth over ₹1.18 crore by Bihar tax authorities. The ITC was blocked after it was found that one of its suppliers, M/s TDML Services Private Limited, was non-existent at its registered address. The court did not quash the blocking order but told the petitioner to use the remedy available under tax guidelines to seek unblocking, leaving all issues open for further consideration.

Get the full picture - access the original judgement of the court order here

Case Name

M/s Graphic Trades Private Limited vs. State of Bihar & Ors.(High Court of Patna)

Civil Writ Jurisdiction Case No. 4506 of 2025

Date: 23rd April 2025

Key Takeaways

  • Blocking of ITC: Tax authorities can block ITC under Rule 86A of the Bihar Goods and Services Tax (BGST) Rules, 2017, if they have “reasons to believe” the credit was fraudulently availed.
  • Supplier Non-Existence: The petitioner’s ITC was blocked because its supplier, TDML Services Pvt. Ltd., was found non-existent at its registered business address.
  • No Pre-Decisional Hearing Required: The court confirmed that a pre-decisional hearing is not mandatory before blocking ITC, but a post-decisional hearing/remedy must be available.
  • Remedy Available: The petitioner can approach the tax authority with evidence to seek unblocking of the ITC, as per the guidelines under Rule 86A.
  • Court’s Approach: The court did not decide on the merits of the case but directed the petitioner to use the statutory remedy first.

Issue

Was the blocking of the petitioner’s Input Tax Credit (ITC) under Rule 86A of the BGST Rules, 2017, lawful, and did it comply with the requirements of recording reasons and providing an opportunity to be heard?

Facts

  • Who?
  • M/s Graphic Trades Private Limited, an IT solutions company based in Patna, Bihar.
  • What happened?
  • The company’s ITC of ₹1,18,41,455 was blocked by the Bihar State Tax Department. This was based on a report that one of its suppliers, M/s TDML Services Private Limited (Kolkata), was non-existent at its registered address.
  • Why?
  • Authorities believed that the petitioner had availed ITC on the basis of fake invoices from a non-existent supplier, which is not allowed under GST law.
  • Timeline:
  • Search at TDML’s address: 17.12.2024
  • Alert Circular issued: 16.01.2025
  • Blocking order issued: 07.02.2025
  • Writ petition filed: Shortly after blocking order.

Arguments

Petitioner (M/s Graphic Trades Pvt. Ltd.)

  • The blocking order did not record independent reasons or show application of mind.
  • No independent investigation was conducted by the local tax officer before blocking the ITC.
  • Blocking ITC without proper reasons or hearing is arbitrary and violates Article 265 of the Constitution.
  • Relied on case laws:
  • Samay Alloys India Pvt. Ltd. vs. State of Gujarat [2022 (61) G.S.T.L. 421 (Guj.)]
  • Dee Vee Projects Ltd. vs. The Government of Maharashtra & Ors. [2022(2) TMI 569]
  • Both cases emphasize the need for recording reasons and not acting mechanically under Rule 86A.


State (Tax Authorities)

  • The blocking was based on credible information from the Central GST authorities that the supplier was non-existent and had issued fake invoices.
  • Rule 86A allows blocking of ITC if there is “reason to believe” it was fraudulently availed.
  • The action is temporary (up to one year) and subject to further investigation.
  • The petitioner has an alternative remedy: they can approach the tax authority with evidence to seek unblocking, as per the guidelines.
  • No requirement for a pre-decisional hearing; post-decisional remedy is sufficient, as held in Dee Vee Projects Ltd..

Key Legal Precedents

  • Rule 86A of the BGST/CGST Rules, 2017:
  • Allows the Commissioner or authorized officer to block ITC if there is “reason to believe” it was fraudulently availed, especially if the supplier is non-existent or there is no actual supply of goods/services.
  • Samay Alloys India Pvt. Ltd. vs. State of Gujarat [2022 (61) G.S.T.L. 421 (Guj.)]:
  • Stressed the need for recording reasons and not acting mechanically under Rule 86A.
  • Dee Vee Projects Ltd. vs. The Government of Maharashtra & Ors. [2022(2) TMI 569]:
  • Blocking ITC is a drastic power and must be exercised with care.
  • “Reason to believe” must be based on objective material.
  • No pre-decisional hearing required, but a post-decisional hearing/remedy must be provided within a reasonable time (ideally within two weeks).
  • Atulya Minerals vs. Commissioner of State Tax (Orissa High Court, W.P. © No. 14540 of 2024):
  • Clarified that the requirement for a Document Identification Number (DIN) is not binding on State Tax Authorities unless adopted by the State.

Judgement

  • Court’s Decision:
  • The court did not find any illegality in the interim order blocking the ITC. It held that the tax authorities had sufficient material (reports and alert circulars) to justify their action under Rule 86A.
  • Remedy for Petitioner:
  • The petitioner was directed to approach the tax authority (respondent no. 4) with a request and supporting evidence for unblocking the ITC, as per the guidelines. The authority must consider this request expeditiously and pass a reasoned order after hearing the petitioner.
  • No Decision on Merits:
  • The court did not decide on the merits of whether the ITC was rightfully blocked or not. All contentions were left open for future proceedings.
  • Writ Disposed:
  • The writ petition was disposed of with these directions.

FAQs

Q1: Why was the ITC blocked?

A: The ITC was blocked because the petitioner’s supplier, TDML Services Pvt. Ltd., was found to be non-existent at its registered address, raising suspicion of fake invoicing and fraudulent ITC claims.


Q2: Did the court order the ITC to be unblocked?

A: No, the court did not order unblocking. Instead, it told the petitioner to use the remedy available under the tax guidelines to seek unblocking from the tax authority.


Q3: Was the petitioner given a chance to be heard before the ITC was blocked?

A: No pre-decisional hearing is required under Rule 86A, but the petitioner can seek a post-decisional hearing/remedy by approaching the tax authority with evidence.


Q4: What should the petitioner do next?

A: The petitioner should submit a request with supporting documents to the tax authority (respondent no. 4) for unblocking the ITC. The authority must then consider and decide the request promptly.


Q5: What legal principles did the court rely on?

A: The court relied on Rule 86A of the BGST/CGST Rules, 2017, and the judgments in Samay Alloys India Pvt. Ltd. and Dee Vee Projects Ltd., which require that blocking ITC must be based on objective material and reasons must be recorded, but a pre-decisional hearing is not mandatory.


Q6: Is the blocking of ITC permanent?

A: No, the blocking is an interim measure and can last up to one year. The petitioner can seek unblocking if they provide satisfactory evidence.