2025 (10) TMI 489 - HC - GST

Rule 86-A of CGST Rules cannot block future or non-existent Input Tax Credit; blocking notice quashed

Rawman Metal & Alloys Versus The Deputy Commissioner of State Tax, Thane.

HC held Rule 86-A of the CGST Rules cannot be used to effect 'negative blocking' of Input Tax Credit-that is, to block credit not available in the ... Invocation of provisions of Rule 86-A of the Central Goods and Services Tax Rules, 2017 (CGST Rules) to block the use of Input Tax Credit (ITC) in the Petitioner’s Electronic Credit Ledger - HELD THAT:- The ITC the assessee might acquire after the blocking order is issued may not even be tainted with any fraud or ineligibility. Rule 86-A, as it currently stands, would therefore not permit the blocking of such ITC, considering the language used by the rule framers. The rule may not explicitly refer to “negative blocking”, but that would be the exact outcome if the rule were interpreted to block ITC unavailable on the order date or the ITC that might be availed in the future. Therefore, a construction based on a seemingly broad interpretation would contravene both the letter and the intention of the rule framers. This is not a narrow interpretation of the rule. It is a case of literal reading in the absence of any ambiguity. Such an interpretation neither renders the rule useless nor makes the outcomes absurd. This interpretation is supported by the principle that taxing statutes must be strictly interpreted, and generally, there is no room for presumed intent. This Petition must succeed, and the impugned blocking notice must be quashed and set aside - there is no dispute that as on the date of issuance of the impugned notices or the blocking orders, the ITC in the Petitioner’s Electronic Credit Ledger was “Nil”. Therefore, the powers under Rule 86A could not have been exercised to block the ITC, which was not even available in the Petitioner’s Electronic Credit Ledger on the date when the satisfaction was recorded or the impugned blocking orders made. Application disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Commissioner or an authorised officer can invoke Rule 86-A of the CGST Rules to block utilisation of Input Tax Credit (ITC) where the Electronic Credit Ledger shows a nil balance at the time the blocking order is made. 2. Whether Rule 86-A permits 'negative blocking' or blocking of ITC that is not then available in the Electronic Credit Ledger, including future credits that may be availed after the date of the blocking order. 3. The correct principle of statutory construction applicable to Rule 86-A: whether a literal/plain reading must be applied to this fiscal provision or whether legislative/executive intent may be invoked to expand its scope. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Power under Rule 86-A when Electronic Credit Ledger balance is nil Legal framework: Rule 86-A(1) authorises the Commissioner or an authorised officer, having reasons to believe that 'credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible', to 'not allow debit of an amount equivalent to such credit in electronic credit ledger' for discharge of liabilities or refund claims; reasons are to be recorded and restriction ceases after one year or when lifted under sub-rule (2). Precedent treatment: Division Benches of the Gujarat and Delhi High Courts have held that invocation requires the presence of ITC in the ledger at the time of the order; the Calcutta High Court reached a contrary view permitting blocking even where no sufficient balance exists. The Telangana High Court followed the Gujarat approach. The Supreme Court declined interference with one Delhi decision (leave denied), leaving that interpretation intact. Interpretation and reasoning: On a plain grammatical reading, the rule's operative words refer to 'credit of input tax available in the electronic credit ledger.' The existence of such available credit at the time of exercising the power is a condition precedent. Where the ledger balance is nil, there is no subject-matter on which to exercise the statutory power to 'not allow debit of an amount equivalent to such credit.' The Court emphasises the primacy of textual language and the settled principle that taxing provisions are strictly construed; absent ambiguity the Court will not read in additional consequences or remedial mechanisms. Ancillary administrative measures and existing recovery provisions (Sections 73, 74, 83, cancellation under Section 29) remain available to Revenue and cannot supplant the textual requirement of Rule 86-A. Ratio vs. Obiter: Ratio - Rule 86-A cannot be validly invoked where the Electronic Credit Ledger contains no ITC at the time the blocking order is made; availability of credit is a condition precedent. Obiter - observations on alternative recovery mechanisms and policy considerations as to Rule 86-A's preventive nature. Conclusion: Invocation of Rule 86-A against a nil ITC balance is ultra vires and such blocking orders must be quashed; where ledger balance is nil on the date of the order, Rule 86-A does not empower negative or retrospective blocking. Issue 2 - Permissibility of 'negative blocking' or blocking future/accruing ITC Legal framework: Rule 86-A speaks of not allowing debit 'of an amount equivalent to such credit in electronic credit ledger', and the heading reads 'Conditions of use of amount available in electronic credit ledger.' Sub-rule (2) permits lifting when conditions cease; sub-rule (3) limits restriction to one year. Precedent treatment: Gujarat and Delhi authorities construe Rule 86-A as confined to available credit; Calcutta authority has held the rule permits blocking irrespective of present sufficiency by focusing on words 'fraudulently availed or is ineligible.' Interpretation and reasoning: The Court rejects the concept of 'negative blocking.' A holding that Rule 86-A permits blocking of future or non-existent credits would require reading words into the rule and thereby changing its plain scope. Such an interpretation would also risk blocking ITC that is legitimately earned after the order and may be untainted; Rule 86-A's text does not authorise pre-emptive restriction on future debits. The rule's limited temporal and material scope (availability, written reasons, one-year ceiling) evidences a preventive but circumscribed power; broader remedial powers for recovery exist elsewhere in the statute and cannot be conflated with Rule 86-A's textual grant. Ratio vs. Obiter: Ratio - Rule 86-A does not authorise 'negative blocking' or blocking of ITC not then available in the ledger; blocking is limited to the quantum of credit available on the date of the order. Obiter - policy observations that broader administrative tools remain to address persistent fraudulent utilisation. Conclusion: Blocking is valid only to the extent of credit available in the Electronic Credit Ledger at the time of the blocking order; future-accruing credits cannot be precluded by Rule 86-A. Issue 3 - Principle of construction applicable to Rule 86-A (plain meaning v. legislative intent) Legal framework: Well-settled doctrines of statutory interpretation require grammatical and ordinary meaning to be applied unless literal application produces absurdity, repugnance or inconsistency; taxation statutes are to be strictly construed; headings and marginal notes may be used to resolve doubt where relevant. Precedent treatment: Authorities cited reaffirm the primacy of literal/grammatical meaning for fiscal statutes and the 'golden rule' of construction with limited departure only to avoid absurd results. Gujarat and Delhi decisions applied these principles; Calcutta decision preferred purposive/intent-focused interpretation. Interpretation and reasoning: The Court applies literal construction to Rule 86-A because its language is plain and unambiguous. The heading reinforces the textual reading. The Court rejects reliance on presumed legislative or executive intent where the statutory language is clear. The argument that a literal reading makes the rule 'otiose' is rejected: other statutory mechanisms address recovery and enforcement; a narrow but text-conforming construction is appropriate for a fiscal provision that confers harsh preventive powers anterior to adjudication. Ratio vs. Obiter: Ratio - Fiscal provisions conferring restrictive preventive powers must be interpreted strictly in accordance with their plain language; courts should not expand such powers by recourse to speculative legislative intent. Obiter - commentary on policy options and available alternative remedies for Revenue. Conclusion: Rule 86-A must be given a literal/plain meaning in the absence of ambiguity; legislative intent cannot be invoked to broaden the Rule's express scope to cover non-existent or future credits. Final disposition and practical directive Because the Electronic Credit Ledger balance was nil when the impugned order was made, the blocking order was beyond the power conferred by Rule 86-A and is quashed; blocked ITC is to be restored. The Court's ruling establishes that blocking under Rule 86-A is limited to the ITC available in the ledger on the date of the order and disallows 'negative blocking.'