Restriction on Input Tax Credit: Rule 86A cannot block a supplier's electronic credit ledger absent allegation of the supplier's own ineligibility.

Rule 86A of the CGST Rules permits restriction of debit to an electronic credit ledger only where the person against whom it is invoked has fraudulently availed or is otherwise ineligible for input tax credit (examples: non existent registered person, non receipt of goods/services, tax not paid to government, absence of prescribed documents); the restriction may be removed when those conditions cease. Where a notice alleges wrongful availment by a recipient based on invoices issued by the supplier, but does not allege the supplier's own ineligibility or fraudulent availment, Rule 86A cannot be applied to block the supplier's credit ledger; the ledger must be unblocked.

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Issues: Whether Rule 86A of the Central Goods and Service Tax Rules, 2017 can be invoked to block or prevent utilization of input tax credit in the electronic credit ledger of the petitioner where the allegation in the show-cause notice pertains to wrongful availment of input tax credit by the recipient of supply (M/s. Million Lights) and not wrongful availment by the petitioner.

Analysis: Rule 86A permits restriction of debit of electronic credit ledger where the credit has been fraudulently availed or is ineligible by the person who availed the credit, including situations where invoices are issued by a non-existent registered person, goods or services were not received, tax charged has not been paid to the Government, the registered person availing credit is non-existent at the registered place of business, or the registered person is not in possession of prescribed documents; the restriction may be removed when those conditions no longer exist and ceases after one year. The show-cause notice alleges that the petitioner issued invoices without underlying supply and that the recipient wrongfully availed credit; the allegations do not assert that the petitioner itself fraudulently availed or is ineligible for input tax credit or that the petitioner is non-existent or not conducting business at the registered place. Applying the plain text and scope of Rule 86A to the facts pleaded in the notice, the statutory power to block debit of the electronic credit ledger cannot be exercised against a person whose own entitlement to credit is not in issue, merely because a recipient is alleged to have wrongfully availed credit based on invoices issued by the person.

Conclusion: The power under Rule 86A cannot be invoked against the petitioner on the basis that the recipient allegedly wrongfully availed input tax credit; the show-cause notice is without jurisdiction and is set aside, and the petitioner's electronic credit ledger shall be unblocked forthwith.

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