HC Allows Partial Negative Blocking, Balancing Pending Liability and Revenue’s Need for Examination.
Issue
Whether the “negative blocking” of an Electronic Credit Ledger (ECL) under Rule 86A is a legally permissible and proportionate measure, particularly when it exceeds the available credit and prevents the assessee from discharging their current tax liabilities.
Facts
- The GST department was directed to block ₹62.3 lakhs of the assessee’s Input Tax Credit (ITC).
- At the time of blocking, the assessee’s ECL had a credit of only ₹14.2 lakhs.
- The officer proceeded to block a “negative” credit of ₹48.9 lakhs, alleging the ITC was from a non-existent supplier.
- The assessee had a pending tax liability of ₹23.75 lakhs but was unable to pay it due to the negative block crippling their account.
- The assessee argued that Rule 86A does not authorize compelling a taxpayer to replenish credit that has already been utilized (which is the effective outcome of a “negative block”).
Decision
The Madras High Court granted a partial interim relief to the assessee to balance the interests of both parties:
- The court allowed the negative blocking to continue, but limited it to ₹37 lakhs (₹48.9 lakhs minus the assessee’s CGST liability of ₹11.8 lakhs).
- It permitted the assessee to debit ₹11.8 lakhs from the negatively blocked credit to discharge its pending tax liability.
- This permission was made conditional: the assessee must replenish this debited amount (₹11.8 lakhs) by the due date of their next tax payment.
- The Revenue was directed to complete the entire adjudication of the matter within a strict timeline of 30 days.
Key Takeaways
- Balancing of Interests: The court’s order is a pragmatic attempt to balance the Revenue’s need to investigate (by not fully quashing the block) with the assessee’s need to remain compliant and operational (by allowing them to pay current taxes).
- Questionable Legality of “Negative Blocking”: The case highlights the highly contentious nature of “negative blocking,” which is not explicitly provided for in Rule 86A. The assessee’s argument that the rule cannot be used to compel the replenishment of utilized credit remains a strong legal challenge.
- Proportionality: The court found the initial block to be disproportionate and modified it to partially secure the revenue while allowing the assessee to function.
- Time-Bound Adjudication: The High Court is increasingly linking drastic provisional measures (like blocking an ECL) to a mandatory, time-bound completion of the investigation, preventing the department from crippling a business indefinitely.