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of <h1>Negative blocking of Electronic Credit Ledger under Rule 86A cannot force taxpayers to replenish with valid ITC</h1> <h3>KINGS SECURITY GUARD SERVICES PRIVATE LIMITED Versus DEPUTY DIRECTOR, DIRECTORATE GENERAL OF GST INTELLIGENCE</h3> KINGS SECURITY GUARD SERVICES PRIVATE LIMITED Versus DEPUTY DIRECTOR, DIRECTORATE GENERAL OF GST INTELLIGENCE - 2025 (95) G.S.T.L. 92 (Del.) ISSUES PRESENTED AND CONSIDERED 1. Whether an order under Rule 86A(1) of the relevant Rules may operate so as to prevent debit from an Electronic Credit Ledger (ECL) resulting in a negative balance ('negative blocking'), i.e., disallow debit in excess of ITC actually available in the ECL at the time of the order. 2. Whether Rule 86A(1) is a provisional emergent measure for protection of revenue distinct from recovery or assessment proceedings under Sections 73/74 (and related machinery provisions), and whether prior show-cause proceedings are required before passing an order under Rule 86A(1). 3. Consequences and relief where negative blocking is effected: scope of quashing such orders and entitlement to consequential reliefs. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of negative blocking of ECL (disallowing debit beyond available ITC) Legal framework: Rule 86A(1)-(3) permits an officer, on reasons to believe that ITC in the ECL has been fraudulently availed or is ineligible, to not allow debit of ITC in the ECL as a temporary protective measure; Sub-rule (2) requires restoration if conditions cease; Sub-rule (3) limits operation to one year. Sections 73 and 74 (and related Chapters XII, XIV, XV) provide for determination/recovery of wrongly availed ITC. Precedent treatment: The Court applied the reasoning in a recent decision addressing an 'identical question', which held that Rule 86A is an emergent protective measure and does not contemplate an order that effectively requires a taxpayer to replenish the ECL (i.e., deny use of legitimately available ITC by blocking to a negative balance). That precedent was followed. Interpretation and reasoning: The Court reasoned that Rule 86A(1) is designed only to temporarily withhold utilisation of available ITC where there is a reason to believe ITC has been fraudulently availed or is ineligible. Construing Rule 86A(1) to prevent debit beyond the ITC available at the time of order (thereby creating a negative ECL) would transform a protective emergent provision into a recovery mechanism, forcing increased cash outflow and effectively compelling taxpayers to replace past utilisations - an interpretation incompatible with the text and purpose of Rule 86A and the statutory recovery/assessment scheme under Sections 73/74. Ratio vs. Obiter: Ratio - Rule 86A(1) cannot be interpreted to permit negative blocking of the ECL; its operation is confined to withholding available ITC up to the quantum present at time of order. Obiter - Observations on ancillary measures such as provisional attachment under Section 83(1) as alternative revenue-protection tools are explanatory but supportive of the ratio. Conclusions: Negative blocking (disallowing debit in excess of available ITC so as to put ECL into negative) is impermissible under Rule 86A(1); such orders are liable to be quashed to the extent they disallow debit beyond the ITC actually available at the time of the impugned order. Issue 2 - Nature of Rule 86A(1): emergent protective measure vs. part of assessment/recovery machinery; requirement of prior proceedings Legal framework: Rule 86A(1) authorizes temporary withholding of debits from ECL on reasons to believe of fraudulent or ineligible availment; Sections 73/74 and Chapters XII, XIV, XV set out assessment, determination and recovery; Section 83(1) permits provisional attachment of property including bank accounts. Precedent treatment: The Court followed the precedent that characterized Rule 86A as an emergent, protective provision distinct from assessment and recovery proceedings and that it does not require prior show-cause notice before an order under Rule 86A(1) is passed. Interpretation and reasoning: The Court accepted that Rule 86A(1), by its nature, is temporary and may be invoked without initiating prior proceedings because it is intended for immediate protection of revenue where the officer has reason to believe fraudulent/ ineligible ITC exists. However, the Court emphasized that such temporary blocking must be limited in effect and accompanied by subsequent exercise of statutory remedy provisions (Sections 73/74 and, if necessary, provisional attachment under Section 83(1)) to determine and recover any wrongly availed ITC. Ratio vs. Obiter: Ratio - Rule 86A(1) may be invoked without prior proceedings as an emergent protective measure; it is not a substitute for the statutory assessment/recovery process. Obiter - The Court's discussion on the interplay and sequencing between Rule 86A measures and other protective measures (e.g., provisional attachment) is clarificatory. Conclusions: Orders under Rule 86A(1) need not be preceded by show-cause proceedings and are temporary emergent measures; nevertheless, they must be exercised within their limited scope and not be construed to effect substantive recovery in place of Sections 73/74 processes. Issue 3 - Relief against orders effecting negative blocking and entitlement to consequential reliefs Legal framework: Judicial review of administrative orders under Rule 86A where they exceed statutory scope; Sub-rule (2) duty to permit debit if conditions cease; Sub-rule (3) time limit of one year. Precedent treatment: The Court applied the holding of the cited precedent which set aside impugned orders to the extent they disallowed debit in excess of available ECL balances. Interpretation and reasoning: Since negative blocking is impermissible, the Court found that orders implementing such blocking must be quashed insofar as they prevent debit beyond the ITC then available. The Court recognized that affected taxpayers are entitled to consequential reliefs flowing from quashing of an unlawful deprivation of legitimate credit usage. Ratio vs. Obiter: Ratio - Quashing of orders is required to the extent of negative blocking; consequential reliefs flow from such quashing. Obiter - The Court did not specify the full gamut of consequential remedies but affirmed entitlement in principle. Conclusions: Orders effecting negative blocking on the ECL are quashed and set aside to that extent; the taxpayer is entitled to consequential reliefs arising from revocation of the unlawful blockage. Cross-references and Interaction of Issues The Court treated Issues 1 and 2 as interrelated: Rule 86A(1)'s emergent protective character (Issue 2) informs the permissible scope of blocking (Issue 1). The availability of other protective measures under the Act (e.g., Section 83 provisional attachment and Sections 73/74 assessment/recovery) reinforces that Rule 86A cannot be read to effect substantive recovery by allowing negative ECL balances. Relief (Issue 3) logically follows where Rule 86A is over-extended into negative blocking.
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