2025 (12) TMI 207 - HC - GST

Negative ITC blocking under Rule 86A disallowed; recovery beyond available credit must proceed via Sections 73/74

HC held that under Rule 86A CGST/PGST Rules, authorities may temporarily block debit of Input Tax Credit (ITC) from the Electronic Credit Ledger (ECL) ... 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 Whether Rule 86A of the Punjab Goods and Services Tax Rules, 2017 permits the Commissioner or authorised officer to block the Electronic Credit Ledger by an amount exceeding the input tax credit available therein at the time of passing the blocking order, thereby creating a negative balance. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Scope of power under Rule 86A to block Electronic Credit Ledger and permissibility of 'negative blocking' (a) Legal framework (as discussed) 2.1 The Court proceeded on Rule 86A of the 2017 Rules, which empowers the Commissioner or an authorised officer (not below the rank of Assistant Commissioner) to disallow debit of input tax credit from the Electronic Credit Ledger when there is 'reason to believe' that such credit has been fraudulently availed or is ineligible, to the extent of an 'amount equivalent' to such credit. 2.2 The Court relied on the interpretation of Rule 86A by other High Courts, particularly holding that availability of input tax credit in the Electronic Credit Ledger is a condition precedent for invoking Rule 86A, and that the rule only authorises temporary disallowance of debit of existing credit, not the creation of a negative balance or permanent recovery. (b) Interpretation and reasoning 2.3 It was undisputed that the petitioner's Electronic Credit Ledger was blocked on specified dates and that the blocking resulted in a negative balance, i.e. debit restriction in excess of the input tax credit actually available during the relevant period. 2.4 The Court adopted and reiterated the reasoning earlier given in its own decision (decided on 04.11.2025), which had endorsed the views of the Gujarat, Delhi, Telangana and Bombay High Courts on Rule 86A, and declined to follow contrary views of other High Courts. 2.5 The Court, following the reasoning of the Gujarat High Court, held that: (a) A primary and mandatory condition for invoking Rule 86A is that credit of input tax must be available in the Electronic Credit Ledger at the time of invocation. (b) Where no input tax credit is available or such credit has already been utilised, Rule 86A cannot be invoked; insertion of a negative balance is wholly without jurisdiction and illegal. (c) Rule 86A is divided into a conditions part (when it can be invoked) and a consequences part (the effect once invoked); if the conditions are not met, the consequences cannot follow. (d) The expression 'amount equivalent' in Rule 86A relates to the quantum of restriction on debit of existing credit; the rule presupposes the existence of such credit in the ledger and does not authorise over-blocking beyond what is available. (e) Rule 86A does not empower the proper officer to make debit entries or effect permanent recovery; it merely allows temporary disallowance of debit, and permanent recovery must follow the statutory mechanism under sections 73 or 74 of the Goods and Services Tax Act. 2.6 The Court accepted that Rule 86A is a harsh, preventive provision, operating at a stage anterior to assessment or demand, and therefore must be strictly confined to its statutory language. The plain language does not permit its exercise without availability of credit in the ledger, and no supposed legislative intendment can be used to expand the scope to permit negative blocking. 2.7 The Court endorsed that non-issuance of prior notice or show cause notice before invoking Rule 86A does not, by itself, vitiate the order, since the provision is intended for emergent situations; however, this does not authorise negative blocking, which remains beyond jurisdiction. 2.8 The Court noted that concerns about taxpayers persistently availing and utilising fraudulent credit cannot justify stretching Rule 86A beyond its text, as the authorities retain other statutory remedies, including proceedings under sections 73 or 74, cancellation of registration, and provisional attachment under section 83. 2.9 The Court recorded that even the respondent's counsel could not dispute that the controversy was squarely covered by the earlier decision of the same Court, which had also taken note that the view of the Delhi High Court on Rule 86A had been upheld by the Supreme Court by dismissal of special leave petitions. (c) Conclusions 2.10 The Court held that Rule 86A does not permit the Commissioner or authorised officer to block the Electronic Credit Ledger in excess of the input tax credit available therein at the time of passing the order; 'negative blocking' of the ledger is without jurisdiction and illegal. 2.11 The impugned blocking entries in the Electronic Credit Ledger were set aside to the extent they disallowed debit in excess of the input tax credit available at the relevant time. 2.12 The writ petition was allowed in terms of the Court's earlier decision on the same issue, while reserving liberty to the respondent authorities to resort to appropriate statutory remedies for recovery, in accordance with law, including proceedings under the applicable provisions of the Goods and Services Tax enactments.