Tvl. Nualco Private Limited Vs Assistant Commissioner (ST) (Madras High Court)
Summary: The Madras High Court considered a writ petition filed by Tvl Nualco Private Limited challenging a notice dated 16.06.2026 blocking the Input Tax Credit (ITC) available in its electronic credit ledger in relation to alleged supplies received from Vetrivel Traders. The notice had been issued under Rule 86A of the applicable GST Rules, and the petitioner sought unblocking of the ledger. The petitioner submitted that proceedings under Section 74A had culminated in an order dated 25.08.2026 and that it consequently had a statutory right to appeal under Section 107. It contended that, under Section 107(7), recovery of the balance amount would be deemed stayed after satisfying the pre-deposit requirement and that the pre-deposit could be made by utilising amounts available in the electronic credit ledger under Section 49(4). The petitioner therefore argued that invocation of Rule 86A deprived it of a statutory right and that Rule 86A was subordinate to the statute. It also stated that it had furnished relevant documents to establish eligibility for ITC under Section 16.
The Revenue opposed the contention and stated that the credit had been blocked in relation to supplies received from Vetrivel Traders. Referring to the assessment order, the Revenue pointed out that the premises of Vetrivel Traders had been inspected and no physical stock was found there. A finding had also been recorded that Vetrivel Traders was a bill trader. The Revenue therefore contended that the circumstances justified blocking of the credit. The Court then examined Section 16(1), which enables rules to be framed imposing conditions and restrictions regarding availment and utilisation of ITC, and noted that Rule 86A had been framed pursuant thereto.
The Court reproduced Rule 86A, under which the Commissioner or an authorised officer not below the rank of Assistant Commissioner, having reasons to believe that ITC available in the electronic credit ledger had been fraudulently availed or was ineligible in specified circumstances, may, for reasons recorded in writing, disallow debit of an equivalent amount from the electronic credit ledger. The Rule covers circumstances including credit based on documents issued by a non-existent or non-operational registered person, credit availed without receipt of goods or services, tax charged on a supply not having been paid to the Government, or absence of the prescribed tax invoice or debit note. Rule 86A(2) permits unblocking where the conditions for restriction no longer exist, while Rule 86A(3) provides that the restriction ceases after one year from the date it is imposed.
The petitioner principally contended that blocking the credit prevented it from using the electronic credit ledger for the pre-deposit required for an appeal under Section 107. It relied on Section 49(4), under which the amount available in the electronic credit ledger may be used for payments towards output tax subject to prescribed conditions and restrictions. The Court held that this right was not unfettered. Reading Sections 107 and 49 together with Rule 86A, the Court concluded that an appellant is ordinarily entitled to use the electronic credit ledger to discharge liabilities, including pre-deposit requirements, but that such utilisation is impermissible where a blocking order has been issued under Rule 86A. The Court therefore rejected the contention that Section 49(4) confers an absolute right to use amounts standing in the electronic credit ledger.
The petitioner had separately filed an application on 27.08.2026 seeking unblocking of the electronic credit ledger. The Court noted that Rule 86A(2) expressly enables a taxable person to seek unblocking and empowers the competent authority to allow debits if satisfied that the conditions for blocking no longer exist. Considering that the application was already pending, the Court directed the respondent to consider it expeditiously. If the request was accepted, no written order was required; if it was proposed to be rejected, a speaking order was to be issued within one month after providing a reasonable opportunity to the petitioner. The writ petition was accordingly disposed of, with no order as to costs.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
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.
