Case Summary: High Court Quashes “Negative Blocking” of Electronic Credit Ledger
1. The Core Dispute: Blocking Non-Existent Credit
The jurisdictional GST authority blocked the Electronic Credit Ledger (ECL) of the assessee. However, since the ledger had a Nil balance at the time, the department recorded a negative entry.
The Problem: By inserting a negative balance, the department effectively “pre-blocked” future Input Tax Credit (ITC). Any new credit the assessee earned would first be used to offset this negative entry before the taxpayer could use it to pay their taxes.
The Assessee’s Stand: Rule 86A only allows the blocking of available credit. Creating a negative balance is an unauthorized “permanent recovery” without the due process of adjudication.
The Revenue’s Stand: They argued that the power to block credit should cover the entire amount allegedly wrongly availed, regardless of whether it is currently in the ledger, to protect the interest of the revenue.
2. The Legal Ruling: Rule 86A is a “Stop-Gap,” Not a Recovery Tool
The High Court held that the department had overstepped its jurisdictional bounds, aligning with similar views from the Gujarat, Delhi, and Bombay High Courts.
I. Prerequisite of “Available” Credit
The Court emphasized the plain language of Rule 86A, which states that the officer may “not allow debit of an amount… equivalent to such credit available in the electronic credit ledger.”
If balance is Nil: You cannot block what does not exist.
No Negative Blocking: The rule does not authorize the department to create a negative balance or lien against future credits.
II. Emergency Measure vs. Regular Recovery
Emergent Situation: The Court agreed with the Revenue that because Rule 86A is an “emergency measure” to prevent immediate fraud, no prior notice (Show Cause Notice) is required before blocking.
Temporary Measure: However, it is only a temporary withholding of available funds.
Proper Recovery: If the credit has already been utilized and the ledger is empty, the department must use Section 73 or 74 (Adjudication) to recover the money. They cannot bypass these sections by simply “blocking” future earnings.
3. Final Order and Impact
Outcome: The “negative blocking” entries were declared unsustainable and illegal. The Court ordered the authorities to restore the credit ledger to its original state.
Liberty to Revenue: The department remains free to initiate regular recovery proceedings under the law if they believe the ITC was fraudulently availed.
Key Takeaways for Taxpayers
Check Your Ledger: If your ECL shows a negative balance, it is a “negative block” and can be challenged as unconstitutional.
No Notice Required: Be aware that the department can block your ledger without telling you first (pre-decisional hearing is not mandatory), but they must have recorded “reasons to believe” in writing.
One-Year Limit: Any block under Rule 86A is valid for a maximum of one year. If the department has not started adjudication by then, the block must be lifted and cannot be “re-blocked” on the same grounds.
“28. Rule 86A of the CGST Rules empowers the Commissioner or his subordinates to freeze the debit in the electronic credit ledger provided he has reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible. Thus, the condition precedent is that the input tax credit should be available in the electronic credit ledger before the power under Rule 86-A is invoked by the authority. In the case on hand, it is not in dispute that the amount of input tax credit available in the electronic credit ledger as on the date of blocking of ledger was Nil. If no input tax credit was available in the ledger, the blocking of electronic credit ledger under Rule 86-A of the Rules and insertion of negative balance in the ledger would be wholly without jurisdiction and illegal.
29. On a plain reading of the opening part of Rule 86A(1) of CGST Rules, 2017, it transpires that the power conferred under Rule 86A can be exercised by the Commissioner or an officer authorised by him (not below the rank of an Assistant Commissioner). Further the powers can be exercised if the following cumulative conditions are satisfied, (i) Credit of input tax should be available in the electronic credit ledger, (ii) The Commissioner of an officer authorised by him should have reason to believe that such credit has been fraudulently availed or is ineligible, (iii) The reason to believe are be recorded in writing.
30. In case the above referred conditions are satisfied, a proper officer can invoke Rule 86A. Upon invocation of Rule 86 A, a proper officer can – (a) Disallow debit from the electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount, (b) Such restriction should be for an amount equivalent to the amount claimed to have been fraudulently availed or is ineligible
31. Rule 86A (1) of CGST Rules, 2017 is broadly divided into two parts. The opening part of the rule deals with the conditions required to be fulfilled in order to invoke the powers under the rule. The second part of the rule provides for the consequences in case Rule 86A is invoked.
32. In other words, in case the conditions prescribed for the invocation of Rule 86A are not fulfilled, the officer cannot invoke the rule, and in such scenario, the consequences provided in the rule becomes ex-facie inapplicable.
33. One of the primary conditions in order to invoke Rule 86A is that the Credit of input tax should be available in the electronic credit ledger. Further, such credit should be claimed to have been (supported by reason to believe recorded in writing) fraudulently availed.
34. Accordingly, in case where (i) Credit of input tax is not available in the electronic credit ledger or (ii) such credit has already been utilised, the powers conferred under Rule 86A cannot be invoked.
35. Further, Rule 86A is not the rule which entitled the proper officer to make debit entries in the electronic credit ledger of the registered person. The rule merely allows the proper officer to disallow the registered person debit from the electronic credit ledger for the limited period of time and on a provisional basis. In case debit entries are made by the proper officer, the same will tantamount to permanent recovery of the input tax credit and certainly permanent recovery is governed by the statutory provisions (Section 73 of 74 of CGST Act) and it certainly travels beyond the plain language and underlined intent Rule 86A.
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41. In the aforesaid regard, first the language of an amount equivalent appears in the later portion of the rule which provides for the consequences in case the conditions for invocation of the rule are satisfied. As already discussed, the rule itself can be invoked only in case where the credit of input tax is available in the electronic credit ledger and accordingly, the consequence of the invocation cannot determine the applicability of the rule. Secondly, once the input tax credit is claimed in electronic credit ledger, the credit becomes part of one fungible pool and the credit cannot be separately identified. Having regard to the same, the rule provides for restriction on an equivalent amount and not the credit itself. However, the rule presupposes existence of such credit in the electronic credit ledger.
42. A doubt may also arise that a registered person may persistently and continuously avail and utilise the fraudulent credit and in such scenario the strict interpretation of Rule 86A will defeat the underlying purpose of enacting such a preventive provision. In this regard. Rule 86A is not the only measure available with the Government. The Government can certainly initiate proceedings under the provisions of section 73 or section 74, as the case may be, for recovery of credit wrongly claimed. Further, the Government in an appropriate case may initiate proceeding for Cancellation of registration (either of the supplier of the recipient or both) under Section 29 of CGST Act. Furthermore, the Government can also provisionally attach any property, including bank account, belonging to the taxable person under Section 83 of CGST Act.
43. Accordingly, the fact or possibility of registered person availing and utilising the fraudulent credit persistently and continuously cannot be the basis to invoke Rule 86A.
44. The power to restrict debit from the electronic credit ledger is extremely harsh in nature. The rule outreaches the detailed procedure provided in the legislature for determination of input tax credit wrongly availed or utilised provided in Section 73 and 74 of CGST Act and empowers the officer to unilaterally impose certain restrictions in compelling circumstances. In other words, Rule 86A is invoked at a stage which is anterior to the finalization of an assessment or the raising of a demand. Accordingly, it should be governed strictly by specific statutory language which conditions the exercise of the power.
“49. Thus, the principle of law discernible from the aforesaid two decisions of the Supreme Court is that there can be no action based on any supposed intendment of the provision. Since the plain language of Rule 86A does not permit its exercise without there being availability of credit, the same could not have been invoked in the present case.”