Blocked Electronic Credit Ledger Cannot Be Used for Section 107 Pre-Deposit Pending Rule 86A Unblocking Request
Issue
Whether an assessee has an absolute right under Section 49(4) to utilize funds in an Electronic Credit Ledger (ECL) for paying the mandatory pre-deposit under Section 107 when the credit ledger has been provisionally blocked by the tax authorities under Rule 86A.
Facts
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The petitioner challenged a notice issued by the tax department blocking its Input Tax Credit (ITC) in the Electronic Credit Ledger in relation to supplies received from M/s. Vetrivel Traders.
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The blocking was initiated after an inspection of the supplier’s premises revealed an absence of stock and indicated that the supplier was engaged in non-genuine bill trading without actual movement of goods.
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The petitioner submitted an application under Rule 86A(2) requesting the unblocking of its Electronic Credit Ledger.
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During the writ proceedings, the petitioner proposed to file a statutory appeal under Section 107 against the assessment order and sought to utilize the blocked ITC in its credit ledger to discharge the mandatory 10% pre-deposit requirement under Section 49(4).
Decision
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Decided in favour of the Revenue.
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No Absolute Right During Blockade: The High Court held that while Section 49(4) ordinarily permits the utilization of the Electronic Credit Ledger to discharge tax liabilities (including pre-deposits), this right is not absolute and cannot be exercised when the credit stands validly blocked under Rule 86A [Para 9].
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Validity of Provisional Blocking: Blocking of credit under Rule 86A is a provisional measure valid for up to one year, contingent upon recording written reasons to believe, which were sufficiently satisfied and recorded in the impugned notice [Para 9].
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Directions for Expedition: The court directed the respondents to consider the petitioner’s pending unblocking application under Rule 86A(2) expeditiously and to pass a reasoned speaking order if they propose to reject the unblocking request [Para 10].
Key Takeaways
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Interplay Between Section 49(4) and Rule 86A: The statutory permission to utilize the Electronic Credit Ledger for making payment of output tax or appellate pre-deposits under Section 107 is subject to restrictions; it remains unenforceable while an ECL is blocked under Rule 86A.
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Rule 86A Safeguards: Provisional blocking of ITC under Rule 86A requires proper “reasons to believe” recorded in writing, specifically where transactions are suspected to involve fake invoicing or non-existent suppliers.
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Remedy for Unblocking: An assessee whose credit ledger is blocked must first secure an unblocking order under Rule 86A(2) before relying on those blocked funds for meeting statutory appellate pre-deposit mandates.
HIGH COURT OF MADRAS
Tvl Nualco (P.) Ltd.
v.
Office of the Assistant Commissioner (ST)
Senthilkumar Ramamoorthy, J.
WP No. 28502 of 2026
AUGUST 28, 2026
Rupesh Sharma for the Petitioner. Ms. Amirta Poonkodi Dinakaran, Additional Government Pleader (Tax) for the Respondent.
ORDER
1. A notice dated 16.06.2026 blocking the Input Tax Credit (ITC) in relation to alleged supplies received by the petitioner from Vetrivel Traders is challenged in this writ petition.
2. Learned Counsel for the petitioner submits that proceedings under Section 74A of applicable GST enactments were initiated and said proceedings culminated in order dated 25.08.2026. As a result, he contends that the petitioner has the statutory right to file an appeal under Section 107 of applicable GST enactments.
3. Relying on sub-section (7) of Section 107, learned counsel submits that recovery proceedings for the balance 90% are deemed to be stayed subject to fulfillment of pre-deposit requirements. For purposes of said pre-deposit, he submits further that the petitioner is entitled to utilize the amounts available in the electronic credit ledger. He relies on sub-section (4) of Section 49 in this regard.
4. Therefore, learned counsel contends that the statutory right of the petitioner to file an appeal and make the pre-deposit by utilizing the amounts available in the electronic credit ledger have been denied to the petitioner by invoking Rule 86A. He contends further that Rule 86A is subservient to the statute and should not be used to deny a statutory right. He also contends that the petitioner submitted all relevant documents to establish eligibility for ITC under Section 16.
5. Responding to these contentions, Ms. Amirta Poonkodi Dinakaran, learned Additional Government Pleader (Tax), submits that blocking of credit was resorted to in respect of supplies received from Vetrivel Traders. Turning to the assessment order, she points out that it is recorded therein that the premises of Vetrivel Traders was inspected and it was found that there was no physical stock at said premises. She also points out that a finding was entered that Vetrivel Traders is a bill trader. Therefore, she contends that the facts and circumstances justify blocking of credit.
6. Section 16(1) enables the Central Government to frame rules imposing conditions and restrictions with regard to the availment and utilization of ITC. Rule 86A was framed pursuant thereto. Said Rule reads as under:
Rule 86A
Conditions of use of amount available in electronic credit ledger:
| 1. | The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible inasmuch as |
| (a) | the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 |
| (i) | issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or |
| (ii) | without receipt of goods or services or both; or |
| (b) | the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or |
| (c) | the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or |
| (d) | the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rue 36, |
may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.
| (2) | The Commissioner, or the officer authorised by him under sub-rule(1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit. |
| (3) | Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction. |
7. Being a provisional measure, sub-rule (3) prescribes the maximum life span of one year. The pre-condition for blocking credit is recording of reasons in writing for such blocking. The impugned notice sets out reasons for blocking credit in relation to supplies received from Vetrivel Traders.
8. The principal ground of challenge by the petitioner is that such blocking deprives the petitioner of the statutory right to use amounts lying in the electronic credit ledger for making the pre-deposit under Section 107. Reliance was placed in this regard on sub-section (4) of Section 49. Said sub-section is set out below:
(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and restrictions and within such time as may be prescribed.
9. The text of sub-section (4) indicates that amounts available in the electronic credit ledger may be utilized for making payments towards output tax under this Act or under the IGST Act subject to such conditions and restrictions as may be prescribed. Therefore, the right under sub-section (4) of Section 49 is not unfettered. It becomes necessary to read Sections 107 and 49 with Rule 86A. If so read, the conclusion that follows is that a person lodging an appeal is ordinarily entitled to use the amount available in the electronic credit ledger to discharge liabilities, including pre-deposit requirements. This course of action is, however, impermissible in cases where a blocking order has been issued under Rule 86A. For these reasons, I am unable to countenance the contention of learned counsel that Section 49(4) confers an absolute right to use amounts available in the electronic credit ledger.
10. The petitioner has filed an application requesting for unblocking of the electronic credit ledger. Said application was made recently on 27.08.2026. Sub-rule (2) of Rule 86A enables the taxable person to request for unblocking. It also empowers the Commissioner or officer authorised by him to allow debits if satisfied that the conditions for blocking do not exist any longer. Considering the fact that the application for unblocking has been made, it is just and necessary that such application be dealt with expeditiously. Therefore, this writ petition is disposed of by directing the respondent to consider the petitioner’s request for unblocking. If the request were to be accepted, it is not necessary to issue an order in writing. If it is proposed to reject the request, a speaking order shall be issued within one month from the receipt of a copy of this order, after providing a reasonable opportunity to the petitioner. There shall be no order as to costs.