Negative ITC blocking beyond electronic ledger balance held ultra vires Rule 86A; authorities directed to unblock excess

HC held that negative blocking of ITC beyond the credit actually available in the electronic ledger is ultra vires Rule 86A, following its earlier ruling in Rawman Metal & Alloyes and concurring with views of Gujarat, Telangana, and Delhi HCs. The impugned communication/order was set aside insofar as it blocked ITC in excess of Rs. 7,06,770/-. Since the petitioner did not dispute blocking up to that amount, the order was restricted to that extent. HC issued a writ of mandamus directing respondents to unblock ITC exceeding Rs. 7,06,770/-, and disposed of the petition.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether Rule 86A of the Central Goods and Services Tax Rules, 2017 permits "negative blocking" of input tax credit in an electronic credit ledger, i.e., blocking an amount exceeding the ITC actually available in the ledger on the date of the order.

1.2 Whether the department is legally entitled to treat an order under Rule 86A as creating a "lien" over future credits so as to block ITC beyond the then existing ledger balance.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Scope of Rule 86A and validity of "negative blocking" and lien theory

Legal framework

2.1 The Court examined Rule 86A(1)(a)-(d) of the Central Goods and Services Tax Rules, 2017, which empowers the Commissioner or authorised officer, for reasons to be recorded in writing, to "not allow the debit of an amount equivalent to such credit in the electronic credit ledger" for discharge of liability under section 49 or for claiming refund of any unutilised amount.

Interpretation and reasoning

2.2 The impugned order blocked ITC of Rs. 2.66 crores when the admitted ITC balance in the electronic credit ledger on the date of the order was only Rs. 7,06,770/-, resulting in "negative blocking" beyond the actual ledger balance.

2.3 The Respondent's stand, as per the affidavit, was that: (a) ITC allegedly fraudulently availed and utilised must be blocked "even if it exceeds the ledger balance"; (b) Rule 86A creates a lien without actual recovery, enabling an order that attaches to future credit entries up to the specified limit; and (c) reliance was placed on a view that Rule 86A is not a recovery provision but a revenue-protection measure allowing amounts to be held back and treated notionally as a lien.

2.4 The Court held that these arguments are directly contrary to the decisions of the High Courts of Gujarat, Telangana and Delhi, which have held that such "negative blocking" is ultra vires Rule 86A, as well as contrary to this Court's own decision in Rawman Metal & Alloyes.

2.5 The Court noted that in Rawman Metal & Alloyes, after considering various High Court decisions (and noting dismissal of Special Leave Petitions against some of them) and the contrary view of the Calcutta High Court and the similar view of the Allahabad High Court in R.M. Dairy Products LLP, it had already taken the view that "negative blocking" beyond the credit actually available in the electronic credit ledger is not permissible under Rule 86A.

2.6 Following its own binding precedent in Rawman Metal & Alloyes, and the consistent view of the High Courts of Gujarat, Telangana and Delhi, the Court rejected the Respondent's contention that Rule 86A authorises blocking of ITC in excess of the existing ledger balance or creates a lien over future credits.

Conclusions

2.7 Rule 86A does not authorise "negative blocking" of ITC, i.e., blocking of an amount exceeding the ITC actually available in the electronic credit ledger on the date of the order.

2.8 Rule 86A does not operate as a provision creating a lien over future ITC credits so as to justify blocking ITC beyond the then prevailing ledger balance.

2.9 The impugned communication/order dated 8 January 2025 is quashed and set aside to the extent it blocks ITC in excess of Rs. 7,06,770/-, and is sustained only to the extent of blocking ITC of Rs. 7,06,770/-, which was not opposed by the petitioner.

2.10 A writ of mandamus is issued directing the Respondent to unblock ITC blocked in excess of Rs. 7,06,770/- within 15 days of uploading of the order.

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