2025 (12) TMI 635 - HC - GST

Rule 86A allows temporary ITC blocking, no notice needed, but bars negative blocking; excess recovery via Sections 73/74

HC held that Rule 86A of the GST Rules, 2017 permits only temporary restriction on utilisation of legitimately available ITC in the ECL where the ... Blocking Electronic Credit Ledger (ECL) of petitioner - blocking of tax payer’s ECL by an amount exceeding the credit available at the time of issuance of said order by Commissioner or an officer authorized by him - Rule 86-A of Goods and Services Tax Rules, 2017 - 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 CGST/PGST. Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether Rule 86A of the Goods and Services Tax Rules, 2017 permits blocking of the Electronic Credit Ledger in an amount exceeding the input tax credit actually available therein at the time of the blocking order, including by creation of a negative balance. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Scope of power under Rule 86A to block Electronic Credit Ledger and legality of 'negative blocking' in excess of available credit Legal framework 2.1 Rule 86A of the Goods and Services Tax Rules, 2017 empowers the Commissioner or an authorised officer 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, subject to conditions in the Rule. Sections 73 and 74 of the Central/State Goods and Services Tax Acts govern determination and recovery of wrongly availed or utilised input tax credit. Section 83 provides for provisional attachment and Section 29 for cancellation of registration. Interpretation and reasoning 2.2 The Court proceeds on the admitted factual position that the petitioner's Electronic Credit Ledger was blocked on specified dates resulting in a negative balance, i.e., blocking in excess of the input tax credit then available. 2.3 Referring to and adopting its prior detailed decision on Rule 86A, the Court reiterates that the right to avail and utilise input tax credit is a statutory right, subject to conditions prescribed in the statute and Rules. 2.4 The Court endorses the interpretation that availability of credit in the Electronic Credit Ledger is a condition precedent for exercise of power under Rule 86A. Where no input tax credit is available in the ledger, invocation of Rule 86A and insertion of a negative balance is without jurisdiction and illegal. 2.5 The conditions for invoking Rule 86A are identified as: (i) credit of input tax should be available in the Electronic Credit Ledger; (ii) the Commissioner or authorised officer must have reason to believe that such credit has been fraudulently availed or is ineligible; and (iii) such reasons must be recorded in writing. Only upon satisfaction of these cumulative conditions can the officer disallow debit from the Electronic Credit Ledger, and such restriction must be for an amount equivalent to the amount of credit allegedly fraudulently availed or ineligible. 2.6 The Court adopts the distinction that Rule 86A is divided into: (a) the opening part prescribing conditions for its invocation; and (b) the later part prescribing consequences once validly invoked. If the preconditions are not met, the Rule cannot be invoked and its consequences are inapplicable. 2.7 It is emphasised that Rule 86A presupposes existence of input tax credit in the Electronic Credit Ledger. Once credit is entered, it forms a fungible pool, and the Rule provides for restriction of an 'equivalent amount' rather than identification of specific credit. This phrase cannot be used to override the basic precondition that credit must actually be available. 2.8 The Court notes and accepts the reasoning that Rule 86A is not a provision authorising the officer to make debit entries or effect permanent recovery of input tax credit in the Electronic Credit Ledger. It only authorises temporary disallowance of debit as a preventive measure, anterior to final assessment or demand. Permanent recovery is governed by Sections 73 and 74 and cannot be achieved indirectly through Rule 86A. 2.9 The argument that a strict interpretation would defeat the preventive purpose of Rule 86A in cases of continuous fraudulent availment and utilisation of credit is rejected. The Court observes that other statutory mechanisms-proceedings under Sections 73/74, cancellation of registration under Section 29, and provisional attachment under Section 83-remain available to the authorities. The possibility of persistent misuse cannot justify stretching Rule 86A beyond its plain language. 2.10 The Court holds that the power to restrict debit from the Electronic Credit Ledger is harsh and overrides the detailed statutory scheme for adjudication and recovery. Therefore, it must be strictly confined to the specific statutory language and preconditions in Rule 86A and cannot be expanded on the basis of supposed legislative intendment. 2.11 The Court confirms that there is no ambiguity in the plain language of Rule 86A and that its literal construction does not lead to absurdity. The Rule only enables temporary withholding of 'available' input tax credit in the Electronic Credit Ledger where there is reason to believe the credit is fraudulently availed or ineligible. 2.12 The Court further reiterates that, being an emergent preventive provision, Rule 86A does not require prior notice or show cause notice before its invocation. However, this absence of prior notice does not authorise blocking beyond the credit actually available, nor creation of a negative balance. 2.13 The Court expressly endorses the view that there cannot be 'negative blocking' under Rule 86A. Where there is no or insufficient input tax credit standing in the Electronic Credit Ledger, Rule 86A cannot be invoked to block any amount in excess of the then available balance. 2.14 The Court aligns itself with the interpretation that contrary views allowing negative blocking are not acceptable, and reiterates that if the department seeks recovery beyond available credit, it must follow the appropriate statutory procedures for adjudication and recovery. Conclusions 2.15 Rule 86A can be invoked only when input tax credit is actually available in the Electronic Credit Ledger at the time of the blocking order; availability of such credit is a mandatory precondition. 2.16 Blocking of the Electronic Credit Ledger beyond the amount of input tax credit available therein, resulting in a negative balance, is beyond the jurisdiction conferred by Rule 86A and is illegal. 2.17 The impugned blocking entries are unsustainable to the extent they disallow debit from the Electronic Credit Ledger in excess of the input tax credit available at the time of such blocking, and stand set aside to that extent. 2.18 Authorities remain at liberty to initiate and pursue appropriate statutory remedies for determination and recovery of any wrongly availed or utilised input tax credit in accordance with law, including proceedings under Sections 73 and 74 and other applicable provisions.