2025 (12) TMI 206 - HC - GST

Rule 86A allows only temporary ITC blocking of available credit; excess recovery must follow Sections 73 and 74

HC held that under Rule 86A of the CGST/PGST Rules, authorities may temporarily block debit of ITC in the Electronic Credit Ledger (ECL) only to the ... Jurisdiction of Commissioner or an officer authorized by him, to block a tax payer’s ECL by an amount exceeding the credit available at the time of issuance of said order - Input Tax Credit has been blocked in negative by the respondents, statedly in violation of provisions of Rule 86A of Central Goods and Services Tax Act, 2017 and Punjab Goods and Services Tax Act, 2017 - violation of principles of natural justice - HELD THAT:- View expressed by High Courts of Gujarat, Delhi, Telangana and Bombay was endorsed by this Court to the effect that there is no ambiguity in the plain language of Rule 86A of 2017 Rules and neither does literal construction of this Rule lead to any absurdity; not allowing debit of ITC is a temporary measure which is to be imposed only if the conditions set out in Rule 86A of 2017 Rules are satisfied, thus, enabling the Commissioner to withhold available ITC in ECL when there is a reason to believe that it has been fraudulently availed or is ineligible. As the provision is for meeting an emergent situation, the view that prior notice (Show Cause Notice) is not required was endorsed. However, at the same time, without availability of credit in the ECL, there cannot be ‘negative blocking’. It is always open to the authorities to resort to statutory measures available for recovery of amount. Whether input tax credit was wrongly availed or utilised would be determined by competent authority in terms of Section 73 and 74 of PGST. After a detailed discussion of applicable provisions and various judgments of the High Courts, as detailed in the foregoing paras, it was held in the case of M/s Shyam Sunder Strips [2025 (11) TMI 486 - PUNJAB AND HARYANA HIGH COURT] that 'we find impugned orders/entries to be unsustainable which are, thus, set aside to the extent that they disallow debit from respective ECLs of petitioner(s) in excess of ITC available therein at the time of passing of/taking of said decision(s)' The present writ petition is allowed in the same terms as held in the above case. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Scope of power under Rule 86A of the GST Rules, 2017: Whether Rule 86A permits blocking of the Electronic Credit Ledger by an amount exceeding the Input Tax Credit actually available, resulting in a negative balance ('negative blocking'). 1.2 Procedural safeguards under Rule 86A: Whether prior notice or show cause notice is mandatory before exercising the power to block the Electronic Credit Ledger under Rule 86A. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of power under Rule 86A and permissibility of 'negative blocking' Legal framework (as discussed): 2.1 The Court examined Rule 86A of the Goods and Services Tax Rules, 2017, in light of its earlier decision, and judgments of other High Courts, particularly the reasoning of the Gujarat High Court in interpreting Rule 86A. The provision empowers the Commissioner or an authorised officer to disallow debit of Input Tax Credit from the Electronic Credit Ledger where there is 'reason to believe' that such credit has been fraudulently availed or is ineligible, for an amount equivalent to such credit. Interpretation and reasoning: 2.2 The Court reiterated that the right to avail and utilise Input Tax Credit is a statutory right, subject to conditions provided in the statute. 2.3 Relying on and endorsing the Gujarat High Court's construction, the Court held that availability of credit in the Electronic Credit Ledger is a condition precedent for invoking Rule 86A. If no Input Tax Credit is available in the ledger on the date of blocking, Rule 86A cannot be validly invoked. 2.4 The Court adopted the reasoning that Rule 86A is divided into: (i) conditions for invocation (including that Input Tax Credit must be available in the ledger and there must be recorded 'reasons to believe' of fraudulent or ineligible availing), and (ii) the consequences (temporary restriction on debit of an equivalent amount). If the preconditions are not satisfied, the consequences cannot operate. 2.5 It was emphasised that Rule 86A only authorises temporary disallowance of debit of existing credit; it does not authorize the officer to create debit entries or impose a negative balance in the Electronic Credit Ledger. Any such negative entry would amount to permanent recovery, which must be effected only through statutory mechanisms such as proceedings under Sections 73 or 74 of the PGST/CGST Acts. 2.6 The Court endorsed the view that once Input Tax Credit is credited to the Electronic Credit Ledger, it forms part of a fungible pool; the rule therefore speaks of blocking 'an amount equivalent' to the allegedly fraudulent or ineligible credit, presupposing the existence of sufficient credit in the ledger. In the absence of such available credit, there can be no blocking under Rule 86A. 2.7 Concerns that a taxpayer may persistently avail and utilise fraudulent credit were held not to justify an extended interpretation of Rule 86A beyond its plain language. The Court noted that other statutory measures remain available to the authorities, including recovery under Sections 73/74, cancellation of registration under Section 29, and provisional attachment under Section 83. 2.8 The Court characterised the power to restrict debit from the Electronic Credit Ledger as 'extremely harsh' and preventive in nature, applied at a stage anterior to determination of liability, and therefore to be strictly confined to the specific statutory language. 2.9 The Court reaffirmed its earlier view that there is no ambiguity in Rule 86A, and that literal construction does not lead to absurdity; therefore, there can be no action based on supposed intendment to justify 'negative blocking' when no credit is available. 2.10 The Court expressly agreed with the interpretation of the High Courts of Gujarat, Delhi, Telangana and Bombay, and expressly declined to follow the contrary view of the High Courts of Calcutta, Allahabad and Andhra Pradesh on this specific issue. Conclusions: 2.11 Rule 86A can be invoked only when Input Tax Credit is actually available in the Electronic Credit Ledger on the date of the blocking order. 2.12 Blocking of the Electronic Credit Ledger in excess of the credit available, resulting in a negative balance ('negative blocking'), is beyond the scope of Rule 86A and is without jurisdiction and illegal. 2.13 Orders or entries disallowing debit from the Electronic Credit Ledger beyond the amount of Input Tax Credit available at the time of the decision are unsustainable and liable to be set aside to that extent. Issue 2 - Requirement of prior notice or show cause notice before blocking under Rule 86A Legal framework (as discussed): 2.14 The Court considered the nature of Rule 86A as a preventive, temporary measure, operating on the basis of 'reasons to believe' recorded by the competent authority, and its relationship to the detailed recovery provisions under Sections 73 and 74 of the PGST/CGST Acts. Interpretation and reasoning: 2.15 The Court reiterated its earlier interpretation that Rule 86A is designed to meet an emergent situation, and is invoked at a pre-assessment, pre-demand stage, distinct from the final determination of liability under Sections 73 and 74. 2.16 In this preventive context, the Court endorsed the view that the rule does not require issuance of a prior notice or show cause notice before blocking the Electronic Credit Ledger, so long as the statutory prerequisites (including 'reasons to believe' recorded in writing) are met. Conclusions: 2.17 Prior notice or a show cause notice is not a mandatory precondition for exercise of power under Rule 86A to temporarily disallow debit of available Input Tax Credit. 2.18 However, even in the absence of prior notice, the authority's action must remain within the limits of Rule 86A and cannot extend to negative blocking or permanent recovery, for which separate statutory procedures are prescribed. Ancillary conclusion - Liberty to pursue other statutory remedies 2.19 While setting aside the impugned blocking to the extent it exceeded the available credit, the Court clarified that the authorities remain at liberty to undertake recovery or other proceedings in accordance with law, including recourse to the statutory mechanisms under the PGST/CGST Acts for determination and recovery of wrongly availed or utilised Input Tax Credit.