Negative Blocking of ITC Beyond 10% of Tax Demand Under Rule 86A Not

The Hon’ble Punjab and Haryana High Court in M/s SS CON CAST PRIVATE LIMITED Versus UNION OF INDIA AND ORS And DEPUTY DIRECTOR Versus RAMESH KUMAR YADAV - 2024 (11) TMI 1480 - PUNJAB & HARYANA HIGH COURT held that input tax credit ledger cannot be negatively blocked beyond 10% of the tentative tax demand at the interim stage, as held in precedents.

Facts:

S S Con Cast Private Limited (“the Petitioner”) challenged the negative blocking of its input tax credit ledger under Rule 86A of the CGST Rules, 2017. It contended that such negative balance was impermissible and invited the Court’s attention to various High Court rulings, including K.J. International through its partner Pawan Kumar Versus State of Punjab and another - 2023 (10) TMI 478 - PUNJAB AND HARYANA HIGH COURT, where the Punjab & Haryana High Court held that credit cannot be blocked beyond 10% of the disputed amount assessed, as this correlates to the statutory pre-deposit requirement under Section 107 of the CGST Act.

The Petitioner submitted that other High Courts such as Delhi, Gujarat and Telangana have also ruled against the concept of negative blocking, whereas the Allahabad and Calcutta High Courts have taken a contrary view.

Issue:

Whether the negative blocking of input tax credit beyond 10% of the tentative tax demand is legally sustainable at the interim stage?

Held:

The Hon’ble Punjab and Haryana High Court in M/s SS CON CAST PRIVATE LIMITED Versus UNION OF INDIA AND ORS And DEPUTY DIRECTOR Versus RAMESH KUMAR YADAV - 2024 (11) TMI 1480 - PUNJAB & HARYANA HIGH COURT held as under:

• Observed that, the legal issue of whether negative blocking of the ITC ledger is permissible under Rule 86A of the CGST Rules, 2017, requires detailed examination.
• Noted that, in K.J. International v. State of Punjab, it was held that blocking of ITC cannot exceed 10% of the disputed  amount assessed, aligning with the condition of pre-deposit for filing an appeal under Section 107 of the CGST Act.
• Held that, at this interim stage, the respondents may block only 10% of the tentative amount of the tax which may be assessed provisionally.
• Further directed that ITC in excess of the said 10% must be unblocked immediately.

Our Comments:

The Delhi High Court, in the case of Best Crop Science Pvt. Ltd. Through Authorized Representative, Sh Raghav Agarwal, M/s. Jai Maa Enterprises, Hilbert Innovations Pvt. Ltd., M/s. Ndcon Constructions, GNG Electronics Pvt. Ltd. Kay Kay Overseas Corporation, Shri Balaji Polymers Through Its Proprietor Mr. Anil Kumar Versus Principal Commissioner, CGST Commissionerate, Meerut And Ors., Commissioner Of Central Tax And GST Delhi North & Ors., Principal Chief Commissioner CGST And CX, Delhi & Ors. Commissioner Of Delhi Goods And Service Tax & Anr., Sale Tax Officer Of Delhi Goods And Service Tax And Another. - 2024 (9) TMI 1543 - DELHI HIGH COURT, held that Rule 86A cannot authorize negative blocking, as it only applies to the ITC balance actually available in the Electronic Credit Ledger (ECL).

In contrast, the Madras High Court in Tvl. Skanthaguru Innovations Private Limited Versus Commercial Tax Officer, Assistant Commissioner (ST), Superintendent of GST, Principal Commissioner of GST & Central Excise, Chennai - 2024 (12) TMI 143 - MADRAS HIGH COURT, upheld negative blocking, interpreting “available in the ECL” to include even nil or negative balances, based on a functional rather than a restrictive reading of Rule 86A.

Similarly, the Calcutta High Court in Basanta Kumar Shaw, Propreitor of M/s. N.M.D. Engineering Works Versus The Assistant Commissioner Of Revenue, Commercial Taxes And State Tax, Tamluk Charge And Others - 2022 (8) TMI 50 - CALCUTTA HIGH COURT adopted a broader view, holding that Rule 86A applies even in the absence of a positive balance, as its purpose is preventive, not merely remedial.

In light of such conflicting interpretations, the Hon’ble Supreme Court has issued notice to decide the legal issue, and the matter is listed for hearing in August 2025 in DEPUTY DIRECTOR & ANR. ETC. Versus RAMESH KUMAR YADAV & ANR. ETC. - 2025 (7) TMI 1625 - SC Order. Until then, interim relief granted by High Courts in K.J. International v. State of Punjab remains binding in respective jurisdictions.

Relevant Provision:

Rule 86A – Conditions of use of amount available in electronic credit ledger

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-

i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

ii. without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.

(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.”

 (Author can be reached at [email protected])