Blocking of Electronic Credit Ledger under Rule 86A Requires Recorded Reasons and Timely Post-Decisional Hearing.

The Hon’ble Bombay High Court in the case of Rithwik Projects Private Limited v. Union of India & Ors. [2025 (10) TMI 962 - BOMBAY HIGH COURT]held that blocking the credit ledger account under Rule 86A of the CGST Rules without providing a timely post-decisional hearing violates principles of natural justice, and such orders must be set aside if statutory conditions are not followed.​​

Facts:

Rithwik Projects Private Limited ('the Petitioner') is a company whose electronic credit ledger under GST was blocked by the GST authorities.

Union of India & Ors. ('the Respondents'), acting through GST authorities, blocked the Petitioner’s credit ledger but did not record any reasons or serve a speaking order.

The Petitioner contended that the impugned action under Rule 86A was carried out mechanically, without satisfaction of the “reason to believe” requirement and without a post-decisional hearing.

The Respondent contended that the Petitioner was issued notices and summons regarding suspect transactions, was given the opportunity to respond, and that recent judgments supported the authorities' power to block credit, provided procedures were ultimately followed.

Aggrieved by the unilateral blocking and lack of reasoned order, the Petitioner approached the High Court through a writ petition under Article 226, seeking quashing of the blocking order.

Issue:

Whether blocking the electronic credit ledger under Rule 86A of the CGST Rules without recording explicit reasons in writing and failing to provide a prompt post-decisional hearing is legally sustainable under GST law?

Held:

The Hon’ble Bombay High Court in 2025 (10) TMI 962 - BOMBAY HIGH COURT held as under:

• Observed that, the impugned order blocking the credit ledger cited no reasons or “reason to believe” as required under Rule 86A.​
• Held that, the order blocking the Petitioner’s credit ledger is set aside, conditional to furnishing a bank guarantee of Rs. 6.5 crores.
• Further held that the Revenue authorities to grant a full post-decisional hearing within four months and barred them from encashing the bank guarantee until four months after the final order in the proceedings.

Our Comments:

In the case of Gujarat High Court in New Nalbandh Traders v. State of Gujarat [2022 (3) TMI 908 - GUJARAT HIGH COURT] the court quashed electronic ledger blocking order on the ground that it lacked reasons to satisfy the “reason to believe” as required under Rule 86A. It also held that, even if the reasons are cited, a post-decisional hearing needs to be given to the aggrieved party within two weeks thereafter.

In this case, it can be seen that for balance of convenience, the High Court directs Revenue to not encash the Bank guarantee until four months  after it passes the decision in the proceedings before it.

The CBEC-20/16/05/2021-GST dated November 2, 2021, provides Guidelines for disallowing debit of electronic credit ledger under Rule 86A of the CGST Rules, 2017. It says that, on perusal of the rule makes it clear that the Commissioner, or an officer authorised by him, not below the rank of Assistant Commissioner, must have 'reasons to believe' that credit of input tax available in the electronic credit ledger is either ineligible or has been fraudulently availed by the registered person, before disallowing the debit of amount from electronic credit ledger of the said registered person under Rule 86A.

The reasons for such belief must be based only on one or more of the following grounds:

a) The credit is availed by the registered person on the invoices or debit notes issued by a supplier, who is found to be non-existent or is found not to be conducting any business from the place declared in registration.

b) The credit is availed by the registered person on invoices or debit notes, without actually receiving any goods or services or both.

c) The credit is availed by the registered person on invoices or debit notes, the tax in respect of which has not been paid to the Government.

Relevant Provisions:

Rule 86A of the CGST Rules, 2017:

'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 tox 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 ayailed 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 19 or for claim of any refund of any unutilised amount (2) The Commissioner, or the officer authorised by him under sub-rule (l) 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])