The Delhi High Court has held that input tax credit blocked under Rule 86A of the Central Goods and Services Tax Rules, 2017, cannot be treated as payment of the mandatory pre-deposit required for filing a GST appeal unless the restriction is removed or suitably modified by the competent authority.
The Division Bench of Justice Anil Kshetrapal and Justice Shail Jain observed that merely blocking credit in a taxpayer’s Electronic Credit Ledger does not amount to its payment or appropriation against an adjudicated demand.
“A restriction under Rule 86A only prevents debit of the specified amount from the ECL. Unless the amount is actually debited or appropriated towards the liability, the requirement of pre-deposit cannot be treated as satisfied merely because the credit has been placed beyond the use of the registered person,” the Court observed.
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The petitioner/assessee company sought rectification of an erroneous summary order in FORM GST DRC-07 and permission to use ₹3,33,257 from its blocked input tax credit towards the pre-deposit for filing an appeal under Section 107 of the CGST Act.
The Directorate General of GST Intelligence, Gurugram Zonal Unit, initiated an investigation into an alleged network of entities connected with N.K. Logistics Private Limited.
During the investigation, Crimson International Private Limited was alleged to be a non-genuine entity that had issued invoices without any corresponding supply of goods or services. Spherion Solutions was identified as one of the recipients of invoices issued by Crimson International.
Based on the investigation, the DGGI issued a show cause notice dated June 27, 2025, alleging that the petitioner had wrongfully availed input tax credit of ₹33,32,568 without receiving the corresponding goods or services.
The company filed its reply and participated in the personal hearings. The adjudicating authority subsequently passed an Order-in-Original on November 25, 2025, confirming an IGST demand of ₹10,40,472 for the financial year 2020-21 and ₹22,92,096 for the financial year 2021-22.
The total tax demand confirmed against the company was ₹33,32,568, along with interest and an equivalent penalty.
The summary of the adjudication order was uploaded on the GST portal in FORM GST DRC-07. However, instead of separately showing the tax demand of ₹33,32,568 and an equivalent penalty, the form reflected the aggregate amount of ₹66,65,136 entirely under the “penalty” head.
The form also incorrectly mentioned the financial year 2018-19 even though the demand related to the financial years 2020-21 and 2021-22.
Consequently, when the petitioner attempted to file an appeal on February 24, 2026, the GST portal calculated the mandatory pre-deposit as ₹6,66,514, representing 10 per cent of ₹66,65,136.
The petitioner contended that the pre-deposit should have been only ₹3,33,257, representing 10 per cent of the disputed tax demand of ₹33,32,568.
The company claimed that it attempted to file a rectification application on February 24 and 25, 2026, but was prevented by a technical error on the GST portal. It then lodged a grievance with the Goods and Services Tax Network on February 25, 2026. The grievance was closed on March 2, 2026, on the ground that the requisite information had not been received, a position disputed by the petitioner.
After the error was brought to the authorities’ attention through the writ petition, the adjudicating authority exercised its power under Section 161 of the CGST Act and uploaded a corrected FORM GST DRC-07 on March 16, 2026.
The tax demand and penalty were thereafter reflected separately. The High Court consequently held that the prayer seeking rectification had become infructuous.
The surviving dispute concerned the petitioner’s request to use part of the credit blocked in its Electronic Credit Ledger for making the mandatory pre-deposit.
The ledger showed that the DGGI had blocked credit aggregating to ₹33,32,568 on November 22, 2024. That restriction was automatically removed through the system on December 1, 2025.
Separately, the Excise and Taxation Officer of the State of Haryana blocked ₹64,386 on October 3, 2025, and a further ₹17,31,702 on January 2, 2026. The subsisting restrictions therefore aggregated to ₹17,96,088.
The petitioner argued that since the blocked credit substantially exceeded the required pre-deposit of ₹3,33,257, requiring an additional cash payment would impose a double burden.
It was submitted that if the company failed in its statutory appeal, the disputed input tax credit would, in any event, be liable to reversal. The petitioner therefore sought permission to utilise ₹3,33,257 from the blocked amount as the statutory pre-deposit.
The company relied upon Section 49(4) of the CGST Act, Rule 86(2) of the CGST Rules and CBIC Circular No. 172/04/2022-GST dated July 6, 2022. It also cited the decisions in Oasis Realty v. Union of India and Yasho Industries Limited v. Union of India to argue that an appeal pre-deposit can be made through the Electronic Credit Ledger.
The petitioner further questioned the successive restrictions imposed under Rule 86A and submitted that its bank account had also been provisionally attached, leaving it without sufficient liquidity to make the pre-deposit in cash.
The department did not dispute the general proposition that input tax credit ordinarily available in an Electronic Credit Ledger may be used for making the pre-deposit under Section 107(6).
It contended, however, that the credit in the present case had been held inadmissible in the adjudication order and its utilisation was restricted under Rule 86A.
According to the Revenue, blocking credit under Rule 86A is a preventive measure and does not amount to its recovery or appropriation against the confirmed demand. Therefore, the mere existence of blocked credit could not satisfy the statutory pre-deposit requirement.
The department also distinguished the decisions relied upon by the petitioner, arguing that those cases concerned credit available for utilisation and not credit blocked under Rule 86A.
The High Court noted that Section 107(6) requires an appellant to pay 10 per cent of the disputed tax as a condition for maintaining an appeal. Section 49(4), meanwhile, permits the use of credit available in the Electronic Credit Ledger subject to the conditions and restrictions prescribed under the GST law.
Rule 86A empowers the competent officer, after recording reasons to believe that input tax credit has been fraudulently availed or is otherwise ineligible, to restrict its utilisation.
A combined reading of these provisions, the Court said, showed that where a Rule 86A restriction remains operational, the corresponding amount cannot be debited from the Electronic Credit Ledger unless the competent authority removes or modifies the restriction.
The Bench clarified that it was unnecessary to decide the wider controversy concerning the use of ordinarily available input tax credit for an appeal pre-deposit because the Revenue had not disputed that proposition.
The decisions in Oasis Realty and Yasho Industries, the Court noted, dealt with credit available for utilisation and did not concern credit blocked under Rule 86A.
The Court also found that the Order-in-Original drew a distinction between the appropriation of credit and the mere confirmation of a demand.
While dealing with Crimson International, the adjudicating authority had specifically appropriated the input tax credit available in its ledger against the confirmed demand. However, while confirming the demand against Spherion Solutions, the authority did not issue any similar direction appropriating the credit available in the petitioner’s Electronic Credit Ledger.
The credit blocked under Rule 86A, therefore, had not been treated in the adjudication order as payment towards the tax demand.
The High Court identified another reason for refusing the requested adjustment. The subsisting restrictions of October 3, 2025, and January 2, 2026, had been imposed by a jurisdictional Excise and Taxation Officer of Haryana.
Neither that officer nor the competent Haryana authority had been made a party to the writ petition.
The existing respondents did not exercise control over those restrictions. The adjudicating authority had not imposed them, the DGGI’s earlier restriction had already expired, and GSTN merely administered the common GST portal.
Any direction permitting the utilisation of the blocked amount would effectively require modification of restrictions imposed by an authority that was not before the Court, the Bench said.
The orders imposing the restrictions were also not placed on record. As a result, the Court could not examine the material considered by the officer or the reasons recorded while invoking Rule 86A.
The descriptions appearing in the Blocked Credit Ledger could not substitute for the reasons required to be recorded by the officer exercising powers under Rule 86A, the Court added.
It further held that the satisfaction contemplated under Rule 86A must be that of the officer imposing the restriction. Such reasons must emerge from that officer’s record and cannot subsequently be supplied by an authority that neither imposed nor controls the restriction.
The ledger placed before the Court also did not disclose the running balance in the petitioner’s Electronic Credit Ledger. It only recorded the amounts blocked or unblocked on different dates and did not establish that the entire ₹17,96,088, or any specified part of it, would presently be available for debit if the restrictions were lifted.
The Court accordingly refused to permit the appropriation of ₹3,33,257 from the blocked input tax credit towards the mandatory pre-deposit.
It nevertheless granted the petitioner liberty to seek removal or modification of the restrictions from the competent authority or challenge them through properly constituted proceedings.
Although the Court rejected the request to treat the blocked credit as pre-deposit, it protected the petitioner’s statutory appellate remedy.
The Bench noted that the petitioner had attempted to file its appeal on February 24, 2026, sought rectification and raised a grievance with GSTN on February 25, 2026. The original FORM GST DRC-07 admittedly contained an error attributable to the adjudicating authority and was corrected only on March 16, 2026.
“The Petitioner cannot be deprived of its appellate remedy on account of the time consumed in obtaining rectification of the erroneous FORM GST DRC-07 and in prosecuting the present Writ Petition,” the Court observed.
The petitioner was consequently permitted to file an appeal under Section 107 within four weeks from the date of the judgment. If filed within that period, the appeal cannot be rejected on limitation and must be considered on merits, subject to compliance with the pre-deposit requirement.
The Court clarified that the pre-deposit need not be made exclusively through the Electronic Cash Ledger. The company can use any credit that is otherwise lawfully available and capable of being debited from its Electronic Credit Ledger.
Credit presently blocked under Rule 86A, however, cannot be treated as payment of the pre-deposit unless the competent authority removes or appropriately modifies the restriction.
The adjudicating authority and GSTN were directed to provide the necessary assistance for electronic filing of the appeal. If the GST portal continues to prevent filing despite the correct completion of FORM GST APL-01 and compliance with Section 107(6), the petitioner must be permitted to submit the appeal manually.
The competent appellate authority was directed to accept and process such a manual appeal in accordance with law.
The Court also restrained the authorities from taking coercive recovery action for four weeks from the judgment. If the appeal is filed within that period after making the prescribed pre-deposit, the statutory protection under Section 107(7) will apply. If no appeal is filed within the stipulated period, the interim protection will automatically cease.
The Bench clarified that it had expressed no opinion on the merits of the tax demand or the validity of the Rule 86A restrictions.
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