Bombay HC: GST ITC Cannot Be Blocked Under Rule 86A If Credit Ledger Has Nil Balance

The Bombay High Court recently determined that under Rule 86A of the Central Goods and Services Tax (CGST) Rules, 2017, Input Tax Credit (ITC) cannot be restricted if the taxpayer’s electronic credit ledger shows a nil balance on the date the blocking order is issued.

This ruling emphasises the conditions under which ITC can be accessed, ensuring that taxpayers are treated fairly when their credit ledgers reflect no balance.

A Division Bench of Justice M S Sonak and Justice Advait M Sethna stated that, “Therefore, on a plain reading of the rule, if on the date of issuing the impugned order or on the date of making an order under Rule 86-A blocking the ITC in the Electronic Credit Ledger, no ITC was found to be available there, then, there would be no question of exercising the powers under Rule 86-A or making any order under Rule 86-A to block such non-available ITC in the Electronic Credit Ledger”.

Rawman Metal and Alloys, submit the petition that contests the order on December 9, 2024, issued by the Deputy Commissioner of State Tax, Thane. The order invoked Rule 86-A to block ITC of Rs 12,84,273, even though the applicant’s electronic credit ledger exhibited a nil balance at the time the order was passed.

The applicant’s counsel claimed that Rule 86-A cannot be applicable in the absence of any available ITC, and that such an application was contrary to the plain language of the rule. He laid on rulings from the Gujarat, Delhi, and Telangana High Courts, all of which had ruled that Rule 86-A can merely be invoked if ITC was available at the time of blocking.

The revenue’s pleader in answer said that the rule must be interpreted to permit restricting to the extent of ITC falsely taken, irrespective of whether it has earlier been used. Any other interpretation would essentially make Rule 86-A pointless, as taxpayers could use the credit before authorities acted.

The Court did not consider the State’s interpretation and quashed the impugned order. It said that, “The argument that the Rule would be rendered otiose cannot be accepted because the Rule enables the proper officer to block the ITC as may be available in the Electronic Credit Ledger, upon there being reasons to believe that the same had been fraudulently availed or was ineligible. If the intention of the legislature or the rule makers was to enable the blocking of any future credit that might be available in the Electronic Credit Ledger, then the Rule would have been differently worded to expressly enable or permit such a consequence”.

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It ruled, “The Rule is accordingly made absolute by quashing and setting aside the impugned order dated 9 December 2024 and directing the restoration of blocked Input Tax Credit equivalent to Rs. 12,84,273.”

The Court said that the restoration must be completed within 15 days of the order being uploaded.