Blocking of Input Tax Credit Without Prior Written Reasons

Blocking of Input Tax Credit Without Prior Written Reasons to Believe Is Wholly Illegal

Issue

Whether the revenue authorities can legally block a taxpayer’s Input Tax Credit (ITC) in their electronic credit ledger under Rule 86A without contemporaneously recording the mandatory “reasons to believe” in writing prior to the blocking action.

Facts

The Dispute: The petitioner-assessee filed a writ petition challenging the department’s action of blocking their Input Tax Credit (ITC) available in the electronic credit ledger.
The Key Contention: The assessee contended that the blocking was executed arbitrarily, without a prior formal order or any recorded “reasons to believe” regarding fraudulent availment or ineligibility.
The Legal Mandate: Under Rule 86A of the CGST/SGST Rules, the Commissioner or an authorized officer (not below the rank of Assistant Commissioner) is empowered to restrict ITC only when there is an active, well-founded reason to believe the credit is fraudulent or ineligible.
The Record: It was an undisputed fact on record that no prior order existed, and no written reasons were documented by the authorities before they disabled the petitioner’s ledger.

Decision

Condition Precedent Contravened: The court held that the subjective satisfaction of the officer must be formed contemporaneously and explicitly recorded in writing before invoking the power to block the ledger.
Exercise of Power Vitiated: The complete absence of recorded reasons directly violated the mandatory statutory preconditions, thereby vitiating the entire exercise of administrative power.
Blocking Declared Illegal: The court ruled that the impugned blocking of the electronic credit ledger was patently illegal and ordered the immediate release of the blocked ITC.
Liberty to Revenue: The petition was decided in favor of the assessee, though the respondents were left at liberty to initiate fresh proceedings strictly in accordance with the law.

Key Takeaways

Strict Construction of Rule 86A: The power to block ITC is an extraordinary, disabling measure. Authorities cannot act first and find reasons later; the recording of “reasons to believe” is a non-negotiable prerequisite.
Protection Against Administrative High-Handedness: Digital ledgers cannot be locked by a mere click of a button or on a casual whim. For an administrative restriction to hold legal validity, it must be backed by a contemporaneous, written, and fact-based paper trail.
Due Process Restores Credit: If the revenue department skips the fundamental steps of due process, the blocking action becomes void ab initio, and courts will proactively direct the restoration of the taxpayer’s operational credit.

HIGH COURT OF PUNJAB & HARYANA

Shreyash Retail (P.) Ltd.

Assistant Commissioner of State Tax^*

Deepak Sibal and Ms. Lapita Banerji, JJ.

CWP No. 14419 of 2026 (O & M)

MAY 12, 2026

Abhinav Sood, Kumar Vislaksha and Ajitesh Dayal Singh, Advs. for the Petitioner. Saurabh Kapoor, Adll. Adv. General for the Respondent.

ORDER

Deepak Sibal, J. – This petition is directed against the blocking of the petitioner’s input tax credit conveyed to the petitioner through email dated 13.01.2026 (Annexure P-1) on the ground that the petitioner’s input tax credit has been blocked without passing any order.

2. Learned counsel for the parties have been heard.

3. Rule 86A of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as ‘the Rules’) clearly provides that the Commissioner or an officer authorized by him in this regard, not below the rank of Assistant Commissioner, can block an assessee’s ITC available in the assessee’s electronic credit ledger but only when such officer has reasons to believe that the ITC available in the assessee’s electronic credit ledger has been fraudulently availed by the assessee or that the assessee is ineligible to avail the ITC existing in its electronic credit ledger.

4. It is not disputed that prior to blocking of the petitioner’s ITC existing in its electronic credit ledger, no order was passed by the competent authority recording therein the reasons as to why he believed that the petitioner’s ITC, existing in its electronic credit ledger, should be blocked. Thus, the impugned blocking of the petitioner’s ITC contravenes Rule 86-A of the Rules. Therefore, we unhesitantly hold that the blocking the petitioner’s ITC, existing in its electronic credit ledger is illegal and order its release. However, the respondents would be at liberty to proceed afresh against the petitioner in accordance with law.

5. Disposed of.