Input tax credit blocking lapses after one year, and a pre-decisional hearing is required before ledger restriction.

Rule 86A(3) of the CGST Rules limits blocking of input tax credit in the electronic credit ledger to one year, after which the restriction lapses by operation of law and the credit must be unblocked. The Bombay HC also held that blocking of input tax credit has serious civil consequences and ordinarily requires a pre-decisional hearing; absent extraordinary circumstances, failure to afford such hearing renders the blocking action unsustainable. The provisional attachment and blocking were therefore set aside, and release of the ledger and attached bank accounts was directed in accordance with law.

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Issues: (i) Whether the blocking of input tax credit in the electronic credit ledger could continue beyond one year under Rule 86A(3) of the Central Goods and Services Tax Rules, 2017; (ii) Whether a pre-decisional hearing was required before blocking the electronic credit ledger.

Issue (i): Whether the blocking of input tax credit in the electronic credit ledger could continue beyond one year under Rule 86A(3) of the Central Goods and Services Tax Rules, 2017.

Analysis: Rule 86A(3) provides that a restriction on debit of input tax credit in the electronic credit ledger ceases to have effect after the expiry of one year from the date of imposition. The continued blocking beyond that period was held to be contrary to the statutory mandate, and the restriction was treated as having lapsed by operation of law. The Court followed the view that the credit must be unblocked once the one-year period expires.

Conclusion: The continued blocking beyond one year was unlawful and the credit was required to be unblocked.

Issue (ii): Whether a pre-decisional hearing was required before blocking the electronic credit ledger.

Analysis: Blocking of input tax credit in the electronic credit ledger entails serious civil consequences and can materially affect business operations. In such a situation, adherence to natural justice required a prior hearing unless extraordinary circumstances justified immediate action. The absence of such a hearing vitiated the impugned blocking order.

Conclusion: A pre-decisional hearing was required and its absence rendered the blocking action unsustainable.

Final Conclusion: The provisional attachment and the blocking of input tax credit were set aside, and the electronic credit ledger and attached bank accounts were directed to be released in accordance with law.

Ratio Decidendi: A restriction on utilisation of input tax credit under Rule 86A(3) lapses automatically after one year, and blocking of the electronic credit ledger, being an action with civil consequences, requires observance of natural justice by affording a pre-decisional hearing unless exceptional circumstances exist.

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