The Bombay High Court has held that powers under Rule 86-A of the CGST Rules, 2017 could not have been exercised to block the future ITC, which was not even available in the Petitioner’s Electronic Credit Ledger on the date when the satisfaction was recorded or the blocking orders made.
The bench of Justice M.S. Sonak and Justice Advait M. Sethna has observed that Rule 86-A allows for the blocking of the Electronic Credit Ledger only to the extent of the credit available in it at the time of exercising the powers under Rule 86-A or when making the blocking order, even if the Revenue has reason to believe that the total credit the assessee might have fraudulently claimed or was ineligible to claim exceeds the amount actually present in the Electronic Credit Ledger.
The bench ruled that the blockage to the extent of credit available on the date of the order’s communication would be intra vires and valid. What Rule 86-A, as it presently stands, does not permit is the blocking of any future credits the assessee might obtain, thereby introducing the concept of “negative blocking,” despite Rule 86-A not allowing such a concept.
The Petitioner challenges the order made by the department purporting to invoke the provisions of Rule 86-A of the Central Goods and Services Tax Rules, 2017 (CGST Rules) to block the use of Input Tax Credit (ITC) in the Petitioner’s Electronic Credit Ledger to the extent of Rs. 12,84,273. At the time when the order was made, the ITC available in the Petitioner’s Electronic Credit Ledger was “Nil”.
The Petitioner, urged that the department was not entitled to invoke the provisions of Rule 86-A and such invocation was ultra vires.
The department contended that on a proper reading and construction of Rule 86-A, it was apparent that the blocking could not be restricted only to the amount available in the Electronic Credit Ledger as on the date of the order, but that the blocking would relate to the entire ITC fraudulently availed. Any other interpretation would virtually render Rule 86-A otiose. The parties, who fraudulently availed of ITC, would then immediately utilise and exhaust the same, rendering it virtually impossible to exercise the powers conferred by Rule 86-A. The legislative or executive intent behind enacting Rule 86-A was to block the utilisation of ITC that may have been fraudulently obtained. Such an intention cannot be frustrated by a narrow construction adopted by the Gujarat High Court and the Delhi High Court.
As per Rule 86-A of the CGST Rule, 2017 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.
The court clarified that the ITC the assessee might acquire after the blocking order is issued may not even be tainted with any fraud or ineligibility. Rule 86-A, as it currently stands, would therefore not permit the blocking of such ITC, considering the language used by the rule framers. The rule may not explicitly refer to “negative blocking”, but that would be the exact outcome if the rule were interpreted to block ITC unavailable on the order date or the ITC that might be availed in the future. Therefore, a construction based on a seemingly broad interpretation would contravene both the letter and the intention of the rule framers.
The court quashed the blocking notice and allowed the petition.
Case Details
Case Title: Rawman Metal & Alloys Versus The Deputy Commissioner of State Tax, Thane
Case No.: Writ Petition (L) No. 10928 Of 2025
Date: 07/10/2025
Counsel For Petitioner: Parmeet Singh
Counsel For Respondent: Amar Mishra, AGP
