The Madurai Bench of the Madras High Court has upheld the blocking of Input Tax Credit (ITC) amounting to over ₹4.10 crore, holding that the GST department had sufficient material to form a “reason to believe” that the credit was fraudulently availed and declined to interfere with the action of the tax department and dismissed the writ petition challenging the blockage of the Electronic Credit Ledger.
The bench of Justice D. Bharatha Chakravarthy observed that Rule 86A is a drastic power but can be validly exercised where adequate material exists indicating fraudulent availment of ITC.
The petitioner company, engaged in the manufacture of TMT steel bars, challenged an order dated March 12, 2026, by which GST authorities refused to unblock ITC aggregating to approximately ₹4.10 crore lying in its Electronic Credit Ledger. The company sought a direction permitting utilization of the blocked credit for discharge of GST liabilities.
The dispute arose after GST authorities conducted searches at the company’s premises in September and October 2025. Following the searches, the department blocked multiple portions of the company’s ITC through separate actions, resulting in a cumulative blockage of more than ₹4.10 crore.
After the company’s representation seeking unblocking of the credit was not acted upon, it approached the High Court earlier. Pursuant to directions issued by the Court in the earlier writ proceedings, the GST department passed a detailed speaking order rejecting the request for revocation of the blockage.
The company contended that the blockage of ITC had severely impacted its business operations and that assessment proceedings concerning the disputed transactions had not yet been completed. It argued that the department’s characterization of the transactions as “fraudulent” was premature in the absence of final adjudication.
The petitioner further submitted that if any suppliers had engaged in wrongdoing, action should be taken against those suppliers rather than against the purchasing manufacturer. According to the company, it could not reasonably be expected to conduct a detailed investigation into the affairs of every supplier with whom it transacted.
The company also emphasized that Rule 86A has severe consequences because blocking ITC effectively restricts business operations. It informed the Court that nearly 500 workers depended on the manufacturing unit and that continued blockage would adversely affect its financial viability. The petitioner even offered to deposit ₹40 lakh without prejudice to its rights and contentions.
The GST department argued that the case involved much more than mere failure to verify suppliers. According to the department, investigations into four specific transactions revealed serious discrepancies indicating that the underlying purchases themselves were not genuine.
The department pointed out that verification of vehicle movements did not support the transportation of goods reflected in the invoices. Further, CCTV footage maintained at the petitioner’s premises allegedly failed to show the entry or exit of vehicles that were purportedly used to transport the goods.
Authorities also relied on E-Way Bills and other contemporaneous records, which, according to them, disclosed circumstances inconsistent with normal business practices and suggested manipulation of records. The department maintained that detailed reasons had been recorded in the speaking order and that invocation of Rule 86A was necessary to safeguard revenue interests.
The High Court reiterated that Rule 86A empowers GST authorities to restrict utilization of ITC where there are recorded reasons to believe that the credit has been fraudulently availed or is otherwise ineligible. The Court acknowledged that the power is drastic in nature and therefore requires careful and cautious exercise.
Referring to judicial precedents, the Court noted that there must be adequate material available to justify the formation of the requisite “reason to believe” and that authorities must pass a reasoned order when deciding representations seeking revocation of the blockage.
A crucial factor that weighed with the Court was the detailed findings recorded by the department concerning four suppliers—M/s D.S. Traders, M/s Ben Global Enterprises, M/s Vinayaga Traders and M/s Sri Murugan Traders. The authorities had found that these entities could not have physically supplied the goods allegedly purchased by the petitioner.
Physical verification of the suppliers’ premises reportedly revealed vacant locations lacking the infrastructure required to handle TMT steel rods or scrap materials. Based on these inspections, the department concluded that the entities were merely fake bill-trading concerns.
The Court also took note of findings that CCTV footage did not corroborate the movement of vehicles allegedly transporting the goods. Further, discrepancies were noticed in inward slips where documents bearing higher serial numbers were shown as received on earlier dates while lower serial numbers appeared on later dates, suggesting possible post-facto manipulation of records.
After examining the speaking order and the materials relied upon by the department, the Court held that there was sufficient objective material supporting the decision to block the ITC. It observed that the authorities had assigned specific reasons and that the case was not one where the action was taken mechanically or without evidence.
The Court therefore declined to accept the company’s argument that the transactions had been wrongly characterized as fraudulent. It concluded that the department’s decision to invoke Rule 86A was backed by adequate material and did not warrant judicial interference.
While upholding the blockage, the High Court cautioned that the GST department cannot continue such restrictions indefinitely without progressing the consequential proceedings. Recording the submission of the Revenue that issuance of a show cause notice was already underway, the Court directed that the proceedings be carried forward and concluded expeditiously in accordance with law.
Accordingly, the writ petition was dismissed and the challenge to the blockage of ITC failed.
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