Goods & Services Tax (GST) in IndiaElectronic Credit Ledger cannot be blocked for the Recovery of ITC, when moratorium has been imposed by NCLT

The Bombay High Court in Udaykumar Bhaskar Bhat v. Deputy Commissioner of State Taxes and Ors. [WRIT PETITION (L) NO.33851 OF 2023 decided on 06.12.2023]  held that ITC cannot be blocked against whom corporate insolvency resolution process has been initiated by NCLT.

FACTS

Mr. Udaykumar Bhaskar Bhat (hereinafter referred to as the “Petitioner”)  is the Resolution Professional appointed by the National Company Law Tribunal (hereinafter referred to as the “NCLT”) for New Steel Trading Private Limited (hereinafter referred to as the “Company”). The NCLT, Mumbai Bench had admitted an application filed by the financial creditors against the company and an order dated 16.12.2021 was passed under Section 14 of the  Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “IBC”) imposing a moratorium on the Company.

The Deputy Commissioner of State Tax (hereinafter referred to as the “Respondent No.1”) issued a  Show Cause Notice dated 02.10.2023 (hereinafter referred to as ‘SCN’) under  Section 74 of the Maharashtra Goods and Services Tax Act, 2017 ( hereinafter referred to as ‘MGST Act’) alleging that the Petitioner had availed Input Tax Credit (hereinafter referred to as “ITC”) on bogus and fake invoices issued by M/s. Keshav Trading Company.

The Respondent No.1 communicated vide email dated 17.10.2023 that the ITC available in the Electronic Credit Ledger was blocked.

Hence, being aggrieved by the blocking of ITC, the Petitioner has filed the present petition.

ISSE BEFORE THE HIGH COURT 

• Whether the ITC available in the Electronic Credit Ledger can be blocked when a mortarium has been imposed by the NCLT?

CONTENTIONS OF THE PARTIES

The Petitioner relied on Section 14 of IBC and contended that the Department cannot block the credit as it amounts to recovery, which would be contrary to the order passed by NCLT.

The Respondents contended that there has been no illegality caused as the blocking of the ITC of the Petitioner was within the ambit of  Rule 86A of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the “CGST Rules”).

DECISION AND FINDINGS

The Bombay High Court observed that the Respondents ought to move an application before the NCLT to seek appropriate orders on the actions to be taken against the Company.

The High Court further directed the Respondents to approach the NCLT and obtain appropriate orders. Moreover, directed to further adjudicate the SCN expeditiously and in case of recovery against the Company, shall obtain the appropriate orders for recovery from the NCLT.

AMLEGALS REMARKS

The Bombay High Court has objectively allowed the appropriate judicial power i.e, NCLT to adjudicate the matter, and sought to exercise its power by fairly limiting it to directional rather than complete adjudication.

However, when the question of the alleged entity’s solvency is considered, it is essential to uphold the values mentioned in IBC’s preamble. Hence, recovery of taxes cannot be done without the permission of NCLT for the Companies against whom CIRP has been initiated.

– Team AMLEGALS assisted by Ms. Devyani Mishra