GST

Citing allegations of availing fraudulent GST ITC, HC Refuses Refund of Amount

Recently the Madras High Court denied to grant a refund of the amount lying in the electronic cash ledger of the assessee due to serious allegations against the assessee for having availed of fraudulent GST ITC in the electronic credit ledger through a bogus and fictitious input tax invoice with a view to discharge GST liability with no supply. The facts of the case and the court’s observations including the final ruling has been discussed below.

Case in Brief: M/s. MNS Enterprises Vs. Add. Director General Directorate of GST Intelligence

The writ petitioner in this case (the assessee) had requested the court to direct respondent to refund 88,17,754 rupees present in the petitioners’ electronic ledger under Chapter IX of the CGST Act 2017. The petition was filed by M/s.MNS Enterprises under Article 226 of the Indian Constitution. The Electronic Ledger of the petitioner was frozen and hence, the petitioner was unable to utilize the amount mentioned above. The issue raised here was that whether the petitioner could seek a mandamus writ for a refund of amount lying in the electronic cash ledger of the petitioner.

The respondent had issued summons to the petitioners’ proprietor- Sheik Dawood who was arrested and remanded under Judicial custody. During interrogation, statements were obtained from the petitioner’s proprietor where a letter was extracted in which the petitioner had requested one of the customer named Nobal Tech Industries Private Ltd to remit amount due to the petitioner as outstanding to be directly paid to the GSTN account of the petitioner.

Petitioner’s Argument

The petitioners’ counsel stated that the letter obtained was through coercion and the amount lying in the electronic ledger had affected the day-to day business of the petitioner. The petitioner was not able to pay either to the suppliers or pay salary to employees. The petitioner’s counsel further notified the court that by coercing the petitioner to remit the amount directly into the GSTN account without the issuance of show cause notice was without the authority of law and that the department has crippled the business of the petitioner and placed the petitioner’s proprietor under juridical custody, contrary to the guidelines provided under the CGST Act.

The petitioner’s counsel stated that when law prescribes a thing to be done in a specific manner then it must be done in such manner as prescribed under law. The manner in which department should function should be as per CGST Act which requires the department to investigate and then issue a show cause notice under Section 73 and Section 74 of the CGST Act. It should adjudicate in the way as it is provided under the act. The recovery of tax should be done in the manner laid down under law. The counsel for the petitioner placed reliance on two judgements of Bombay HC and Chhattisgarh HC in the case of- New India Civil Erectors Pvt. Ltd., Vs. Union of India and S.Kumar’s Associates Vs. Addl. Comm.

Respondent’s Response: Availment of fraudulent GST ITC

The counsel for the department submitted that it had unearthed fraud of an amount of 11.8 crore rupees committed by the petitioner through fictitious invoices to discharge GST liability and the amount in the GSTN account for a sum of 88,17,754 rupees was a mere 7% of the estimated tax liability, which is pegged at 11.8 crores.

Courts’ Observations

The court placed its reliance on Supreme Courts’ decision in the case of UP vs. Singhara Singh and ors. wherein it was held that when a law mandates a thing to be done in a specific way, then it should be adhered to. Hence the amount deposited into the electronic liability register of the petitioner by his customer cannot be refunded directly. The deposit to the electronic cash ledger of the petitioner can be made not just by the petitioner but can also be made by any other person on petitioner’s behalf which can be found on reading Section 49 of the CGST Act, 2017 read with Rule 86 of the CGST Rules, 2017.

The court observed that if the payment was forced to be made to the electronic liability register of the petitioner by getting a letter from the petitioner, it could be an ingenious manner of creating liquidity crunch to ensure that the amount is not frittered away. Further, whether the amount was paid under compulsion or otherwise, cannot be decided in this summary proceeding. 

The court further noted that the amount lying in the electronic liability register can be used by the petitioner to discharge tax liability against future supplies to be made from the petitioner provided that before such supply the tax that needs to be paid by the petitioner is adjudicated and determined and appropriated in the proceedings under Section 73 or Section 74 of the CGST Act, in which case, Section 79 can be pressed into service.

Final Order

The Court ruled that considering that the amount has not been debited and since it hasn’t been appropriated thus, there is no scope of granting relief to the petitioner under this writ. The court said that it didn’t find any merit in the writ petition hence the writ petition is liable to be dismissed. However, the court gave the liberty to the petitioner to chalk out an appropriate remedy under Section 54 of the CGST Act^[1] as the refund shall be subject to the final outcome of the show cause proceedings. The court asked the respondent for proper issuance of a show cause notice to the petitioner within 3 months.  

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