Quashing of Illegal "Negative Blocking" of Input Tax Credit Beyond Available Ledger Balance

Quashing of Illegal “Negative Blocking” of Input Tax Credit Beyond Available Ledger Balance

1. The Core Dispute: Creating an Artificial “Debt” via Rule 86A

During the period from January 2025 to October 2025, the tax authorities blocked the petitioner’s Electronic Credit Ledger (ECL) under Rule 86A. The block was not limited to the balance currently in the account; instead, the authorities created a negative balance entry.

The Result: This “negative blocking” effectively disabled the petitioner from utilizing any credit they would earn in the future. Any incoming ITC would be automatically “swallowed” by the negative entry until the “debt” was cleared.
Petitioner’s Stand: Rule 86A is a temporary, preventive measure. It only authorizes an officer to “not allow debit” of credit that is actually available in the ledger. It does not permit the creation of a negative balance when the current balance is zero or insufficient.

2. Legal Analysis: “Available” is a Condition Precedent

The High Court strictly interpreted the language of Rule 86A(1), which specifically refers to “credit of input tax available in the electronic credit ledger.”

No Future Attachment: The court held that the existence of ITC in the ledger is a prerequisite for invoking Rule 86A. The rule does not grant the power to block future credits or non-existent credits.
Adjudication vs. Blocking: The court clarified that Rule 86A is not a tool for permanent tax recovery. If the department believes ITC was wrongly utilized in the past, they must initiate formal recovery proceedings under Sections 73 or 74.
Precedent Alignment: The court followed the legal reasoning established by the Gujarat High Court (Samay Alloys) and the Delhi High Court (Best Crop Science), noting that “negative blocking” is ultra vires (beyond the power of) Rule 86A.

3. Final Verdict: Negative Entries Set Aside

The court ruled in favor of the assessee, emphasizing that administrative convenience cannot override the plain text of the law.

The Ruling: Orders or ledger entries that disallowed debits in excess of the ITC available at the time of the decision were declared unsustainable and were set aside.
Liberty to Revenue: The court noted that while negative blocking is illegal, the authorities remain free to pursue legitimate statutory recovery or provisional attachment under Section 83 if they have sufficient cause.

Key Takeaways for Taxpayers

Check the Balance: If your ECL shows a negative figure due to a “Block,” it is a jurisdictional error. Rule 86A only allows freezing what you have, not what you might get.
One-Year Expiry: Remember that any valid block under Rule 86A automatically expires after one year. Authorities cannot “re-block” on the same grounds once this period ends.
Recovery Shield: Demand that the department follow the proper Show Cause Notice (SCN) route for any utilized credit rather than using Rule 86A as a “backdoor” recovery mechanism.

HIGH COURT OF PUNJAB AND HARYANA

Dua Metals

Union of India^*

MRS. LISA GILL and Parmod Goyal, JJ.

CWP No. 32302 of 2025

NOVEMBER 19, 2025

S. Dwarakanath, A.S.G., Gurmeet Singh Makker, AOR, Sarthak Karol, Digvijay Dam, Ms. Divya Jyoti Singh, Raghav Sharma, Rajat Vishnaw, S. Vijay Adithya, Mudit Bansal, Prabhakar Yadav and Abhyudey Kabra, Advs. for the Petitioner. V. Lakshmikumaran, Ms. Nitum Jain, Ms. Neha Choudhary, Ms. Medha Sinha, Swastik Mishra, Advs. and Ms. Charanya Lakshmikumaran, AOR for the Respondent.

ORDER

1. Leave granted.

2. The Union of India and its Assistant Commissioner of Central Goods and Services Tax at Ahmedabad are in appeal, aggrieved by the judgment dated 23.10.2024 passed by the High Court of Gujarat/Torrent Power Ltd. v. Union of India (Gujarat)/[2025] 95 GSTL 437 (Gujarat), Ahmedabad, in relation to the refund of Rs.19,28,86,868/- (Rupees nineteen crores twenty eight lakhs eighty six thousand eight hundred sixty eight only).

3. Torrent Power Ltd., the respondent-company, is a generator and distributor of power in the State of Gujarat. It is not in dispute that the respondent-company collected from its consumers the amounts payable towards Integrated Goods and Services Tax, pursuant to Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017 issued by the Revenue. The said notification was, however, held to be unconstitutional by the High Court, vide the judgment Mohit Minerals Pvt. Ltd. v. Union of India (2020) 74 GSTR 134. The judgment was confirmed by this Court, when the appeals arising therefrom were dismissed by this Court, vide the judgment Union of India v. Mohit Minerals Private Limited. (2022) 10 SCC 700. The amounts paid under and pursuant to the invalidated notification, therefore, became refundable.

4. However, the issue presently is as to whether the High Court was justified in coming up with a procedure, not contemplated by the statute, for refund of such amounts to the class of consumers, who purportedly bore the burden of the tax collected from June, 2017, till the notification was set aside in January, 2020.

5. We may note, in this regard, that Section 54(5) of the Central Goods and Services Act, 2017¹, provides that, upon receipt of an application for refund, the officer is to satisfy himself that the whole or part of the amount claimed as refund is actually refundable and if found to be so, he is required to make an order accordingly and the amount so determined is to be credited to the Consumer Welfare Fund,referred to in Section 57 of the CGST Act. It is only by way of exception under Section 54(8) of the CGST Act that the amount found to be refundable is not credited to the aforestated fund and is paid to the applicant.

6. Section 54(8)(e) of the CGST Act provides to the effect that, notwithstanding anything contained in Sections 54(5), the refundable amount shall, instead of being credited to the fund, be paid to the applicant, if such amount is relatable to the tax and interest, if any, or any other amount paid by the applicant, if he had not passed on the incidence of such tax and interest to any other person.

7. In the present case, as it is an admitted fact that the incidence of the tax that was collected, pursuant to the Notification dated 28.06.2017, was passed on by the respondent-company to the consumers, the exception envisaged by Section 54(8) (e) did not even apply.

8. Despite the same, the High Court accepted the offer made by the respondent-company, by way of an affidavit, stating that it would open a separate designated bank account in a scheduled bank and the refunded amount of Rs. 19,28,86,868/- (Rupees nineteen crores twenty eight lakhs eighty six thousand eight hundred sixty eight only) would be transferred to the said account. The respondent-company undertook that it would not utilize the amount credited in the said account and would offer the same as revenue for the purpose of determination of tariff by the Gujarat Electricity Regulatory Commission under the Electricity Act, 2003.

9. The intention of the respondent-company was that it would go before the Commission and ask for reduction of the charges to be levied on the consumers, so as to adjust the refunded amount, thereby ensuring that the consumers, who suffered the levy of the tax imposed earlier, would be recompensed. However, we may note that this gargantuan exercise would involve more than a crore of consumers situated in two cities, Ahmedabad and Surat. Further, it would be an equally unworkable exercise for the authorities concerned to verify whether the consumers who actually bore the burden of the levy of tax were the beneficiaries of such refund.

10. Further, we must also note that this procedure, which was suggested by the respondent-company and accepted by the High Court by way of the impugned judgment/order, introduces an altogether alien modality for disbursal of a refund, which is not contemplated by Section 54 of the CGST Act and the Rules framed therein.

11. We are, therefore, of the opinion that the judgment under challenge is not sustainable on facts and in law. The same is, accordingly, set aside.

12. The respondent-company shall transfer Rs.19,28,86,868/- (Rupees nineteen crores twenty eight lakhs eighty six thousand eight hundred sixty eight only) to the authorities concerned so as to be credited to the Consumer Welfare Fund, referred to in Section 57 of the CGST Act. The respondent-company shall complete this exercise within a period of three months from today.

13. The appeal is allowed in the aforestated terms.

14. Pending application(s), if any, shall stand disposed of.