Blocking of e-credit account under Rule 86A of the CGST Rules cannot continue beyond one year: Bombay High Court
The Bombay High Court in NZS Traders Pvt. Ltd. v. Union of India & Ors. held that restriction imposed on an electronic credit ledger under Rule 86A of the CGST Rules, 2017 cannot continue beyond one year from the date of imposition and automatically ceases by operation of law upon expiry of that period. In this case, the petitioner’s Input Tax Credit of over ₹4.25 crore was blocked on February 16, 2024 without notice or hearing, and the restriction continued even after the statutory period expired. The Court observed that Rule 86A(3) clearly prescribes an absolute one-year limit for such restrictions and rejected the Department’s argument that cancellation of GST registration or pending proceedings could justify continued blocking. The Court directed that the impugned attachment be set aside while leaving other issues open for adjudication. Relying on earlier precedent, the judgment reaffirmed that Rule 86A is a temporary protective mechanism and not a punitive measure, making strict adherence to the statutory timeline mandatory.
Facts:
NZS Traders Pvt. Ltd. (‘the Petitioner’) had availed Input Tax Credit (ITC) and challenged the blocking of its electronic credit ledger.
The Union of India & Ors. (‘the Respondent’) blocked the Petitioner’s ITC amounting to ₹4,25,75,682/- on February 16, 2024, without issuing notice, show cause notice, personal hearing, or any specific order.
The Petitioner argued that the ITC was validly availed in compliance with the CGST Act, 2017 and that the restriction continued even after expiry of one year, in violation of Rule 86A(3) of the CGST Rules, 2017. The Respondent contended that the Petitioner’s GST registration had already been cancelled and that unblocking of credit would be subject to further action, including issuance of show cause notice.
The Petitioner’s grievance was that despite expiry of the statutory period of one year, the restriction was not lifted, forcing the Petitioner to approach the Court by way of a writ petition seeking unblocking of ITC and quashing of the impugned attachment.
Issue:
Whether restriction on electronic credit ledger under Rule 86A of the CGST Rules, 2017 can continue beyond a period of one year from the date of its imposition?
Held:
The Hon’ble Bombay High Court in Writ Petition No. 4815 OF 2024 held as under:
- Observed that, Rule 86A(3) of the CGST Rules, 2017 clearly mandates that restriction on the electronic credit ledger cannot continue beyond a period of one year from the date of imposition.
- Noted that, in the present case, restriction was imposed on February 16, 2024, and therefore could not have been continued after expiry of one year.
- Observed that, this position was acknowledged by the Department itself in its reply affidavit.
- Held that, by operation of law, the credit ought to have been unblocked, and the Petitioner was not required to approach the Court for such relief as the benefit flows directly from the statutory provision. The court rejected the contention that, cancellation of registration or proposed departmental action could justify continuation of blocking beyond statutory period.
- Held that, the impugned attachment/blocking of credit has ceased to operate upon expiry of one year and directed that, the impugned blocking dated February 16, 2024 be set aside, while leaving all other issues open for adjudication in accordance with law.
Our Comments:
The Court has strictly interpreted Rule 86A(3) of the CGST Rules, 2017 and held that the statutory time limit of one year is absolute, and the restriction automatically lapses “by operation of law.”
The Hon’ble court in the case of Seya Industries Ltd. vs. State of Maharashtra [(2024) 20 Centax 466 (Bom.)] held that restriction under Rule 86A cannot survive beyond one year and must be lifted irrespective of pending proceedings. The reasoning in both cases is aligned, to say that Rule 86A is a temporary protective measure and not a punitive provision and hence, strict adherence to the time limit is mandatory.
Relevant Provisions:
Rule 86A of the CGST Rules, 2017:
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 in as much 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 rule 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.”
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