GST Rule 86A does not constitute a recovery provision: Allahabad HC

R M Dairy Products LLP Vs State of U P and 3 Ors. (Allahabad High Court)

Allahabad High Court adjudicated a writ petition filed by R M Dairy Products LLP against the blocking of input tax credit (ITC) under Rule 86A of the GST Rules, 2017. The petitioner challenged the order passed by the GST authorities, arguing that the rule was misapplied without establishing valid reasons to believe that ITC had been fraudulently availed or was ineligible. The petitioner also contended that the order was premature, as adjudication under Section 74 of the GST Act regarding its purchases from M/s Darsh Dairy & Food Products was ongoing, and recovery could only be initiated three months after the adjudication process as per Section 78 of the Act.

The High Court rejected the petitioner’s arguments, emphasizing that Rule 86A does not constitute a recovery provision but serves to secure revenue by restricting the use of ITC in specific circumstances. The Court clarified that the rule applies when there are reasons to believe that ITC was fraudulently availed or ineligible, such as transactions involving non-existent suppliers. It upheld the authorities’ lien over an equivalent ITC amount in the petitioner’s electronic ledger, provided this action was not construed as recovery or appropriation, which is governed by separate provisions. The writ petition was dismissed, with the Court affirming that Rule 86A is limited to safeguarding revenue interests and does not violate procedural requirements.