Rule 86A cannot be used to block a taxpayer’s Input Tax Credit (ITC) ledger to create a “negative” balance; the power is strictly limited to the credit that is actually available in the ledger at the time of the blocking order.
Issue
Does Rule 86A of the CGST Rules, 2017, empower a tax officer to block a taxpayer’s Electronic Credit Ledger (ECrL) to an extent that it shows a negative balance, thereby pre-emptively blocking ITC that has not yet been availed or credited?
Facts
- The GST department, believing that the assessee had availed fraudulent or ineligible ITC in the past, invoked its powers under Rule 86A to block the assessee’s Electronic Credit Ledger.
- However, at the precise moment the blocking order was passed, the assessee’s ECrL had a nil (zero) balance.
- The department’s action effectively created a “negative block,” meaning any future ITC that the assessee might try to avail would be automatically restricted until the “negative” amount was covered.
- The assessee challenged this, arguing that the department had no power to block a credit that didn’t even exist.
Decision
The Bombay High Court ruled decisively in favour of the assessee.
- It held that the power under Rule 86A is explicitly limited to restricting the debit of an amount that is “available” in the Electronic Credit Ledger. If the balance in the ledger is zero, there is no available credit to block, and therefore, the power under Rule 86A cannot be exercised.
- The court clarified that the rule does not support any form of pre-emptive or anticipatory blocking of future credits. Future ITC may be perfectly legitimate and cannot be tainted by past suspicions.
- It firmly rejected the revenue’s argument about “presumed legislative intent,” stating that taxing provisions must be strictly construed. Expanding the rule to allow for a negative block would amount to judicial legislation, which is impermissible.
Key Takeways
- You Can’t Block What Isn’t There: The power under Rule 86A is strictly limited to the balance that is actually existing and available in the credit ledger at the time the blocking order is issued. An officer cannot block a credit that the taxpayer has not yet availed.
- “Negative Blocking” is Illegal: The concept of blocking a credit ledger into a negative balance is without any legal sanction. The action is considered to be without jurisdiction and will be quashed by the courts.
- No Pre-emptive Strikes on Future ITC: The rule is designed to be a temporary measure to safeguard revenue on a specific, existing amount of suspected fraudulent credit. It cannot be used as a tool to pre-emptively freeze a taxpayer’s future ITC accruals.
- Strict Interpretation of Tax Laws: This ruling is a strong reminder that the powers of the tax department are strictly defined by the letter of the law. Courts will not expand those powers by reading into the law a “legislative intent” that is not explicitly stated, especially when it comes to harsh or restrictive provisions like Rule 86A.