The Honourable High Court of Delhi, in Best Crop Science Pvt. Ltd. vs. Principal Commissioner, CGST Commissionerate (2024) 22 Centax 531 (Del.) has addressed a very important issue on Rule 86A of the Central Goods and Services Tax (CGST) Rules, 2017—that is whether tax authorities can block Input Tax Credit (ITC) more than what is available in a taxpayer’s Electronic Credit Ledger (ECL) at the time of the order of blocking of ITC.
This case involved multiple orders issued by the Commissioner or authorized officers under Rule 86A, that blocked ITC beyond the available balance in the ECL, leading to negative balance in ECL that prevented taxpayers from using the legitimate ITC. It was argued that Rule 86A does not permit blocking ITC beyond what is present in the ECL at the time of the order, claiming that such over-blocking has violated the provisions of Rule 86A. The Revenue contended that the rule allowed blocking ITC even in excess of the available balance if the authorities believed the ITC had been fraudulently availed.
The Petitioner contended that Rule 86A does not authorize blocking ITC beyond what is currently available in the ECL, arguing that this over-blocking violated the statutory provisions of the CGST Act, 2017, which govern the utilization of ITC. The Revenue, however, maintained that the power to block ITC under Rule 86A could extend beyond the available balance if there were reasons to believe that ITC had been fraudulently availed or was ineligible.
However, the court held that Rule 86A is an emergent measure meant to prevent use of wrongful ITC and is not a tool for tax recovery. It emphasized that blocking ITC beyond what is available creates an artificial negative balance, which is not allowed under the CGST Act or the rules. The Court observed that opening part of this rule deals with conditions which are required to be fulfilled in order to invoke the powers under this rule. The opening conditions clearly provide that the credit of input tax should be available in the electronic credit ledger.
In its detailed judgment, the court made a significant observation:
“82. Rule 86A(1) of the Rules does not contemplate an order, the effect of which is to require a taxpayer to replenish his ECL with valid availment of ITC, to the extent of ITC used in the past, which the Commissioner or an officer authorized by him has reasons to believe, was fraudulently availed or was ineligible. Such an interpretation would in effect amount to construe an order under Rule 86A(1) of the Rules as an order for recovery of tax. This is obvious because the taxpayer would now have to incur a larger cash outflow for payment of taxes as he would be denied utilization of validly availed ITC, which he would require to accumulate to compensate for the ITC availed and utilized which the Commissioner or an officer authorized by him, has reasons to believe was fraudulently availed or was ineligible.”
The court referred to several judicial precedents in arriving at its decision, including the judgments of the Gujarat High Court in Samay Alloys India (P.) Ltd. v. State of Gujarat [2022] 135 taxmann.com 243 (Guj.) and the Telangana High Court in Laxmi Fine Chem v. Assistant Commissioner [2024] 87 GSTL 197(2024) 18 Centax 134 (Telangana), both of which dealt with similar issues concerning the interpretation of Rule 86A.
In these cases, the courts similarly held that Rule 86A could only be invoked to block the ITC which is available in the ECL at the time of the order, and that creating a negative balance by blocking more than the available ITC was illegal and beyond the scope of the rule. This ruling safeguards taxpayers from excessive blocking of ITC and confirms that Rule 86A is meant as a temporary protective measure, not a mechanism for tax recovery.
Author Bio
