Case Law Details
Rithwik Projects Private Limited Vs Union of India & Ors. (Bombay High Court)
Blocking of Electronic Credit Ledger under Rule 86A Requires Recorded Reasons and Timely Post-Decisional Hearing: Bombay High Court
The Bombay High Court, in the matter of Rithwik Projects Private Limited v. Union of India & Ors., ruled that the electronic credit ledger of a taxpayer cannot be blocked under Rule 86A of the CGST Rules without adhering to principles of natural justice, which requires recording explicit reasons and providing a prompt post-decisional hearing. The Petitioner’s credit ledger was blocked by the GST authorities without a reasoned, speaking order and without satisfying the “reason to believe” requirement under Rule 86A, which the Petitioner challenged. The Court observed that the blocking order lacked the necessary reasons and, conditional on the Petitioner furnishing a bank guarantee of Rs. 6.5 crores, set aside the blocking order. Furthermore, the Court directed the Revenue authorities to grant the Petitioner a full post-decisional hearing within four months. To maintain a balance, the Court also barred the authorities from encashing the bank guarantee until four months after the final order is passed in the proceedings. This decision underscores the requirement for GST authorities to strictly follow statutory conditions, including recording reasons and granting a hearing, before restricting a taxpayer’s credit ledger.
Facts:
Rithwik Projects Private Limited (‘the Petitioner’) is a company whose electronic credit ledger under GST was blocked by the GST authorities.
Union of India & Ors. (‘the Respondents’), acting through GST authorities, blocked the Petitioner’s credit ledger but did not record any reasons or serve a speaking order.
The Petitioner contended that the impugned action under Rule 86A was carried out mechanically, without satisfaction of the “reason to believe” requirement and without a post-decisional hearing.
The Respondent contended that the Petitioner was issued notices and summons regarding suspect transactions, was given the opportunity to respond, and that recent judgments supported the authorities’ power to block credit, provided procedures were ultimately followed.
Aggrieved by the unilateral blocking and lack of reasoned order, the Petitioner approached the High Court through a writ petition under Article 226, seeking quashing of the blocking order.
Issue:
Whether blocking the electronic credit ledger under Rule 86A of the CGST Rules without recording explicit reasons in writing and failing to provide a prompt post-decisional hearing is legally sustainable under GST law?
Held:
The Hon’ble Bombay High Court in Writ Petition No. 12116 of 2025 held as under:
- Observed that, the impugned order blocking the credit ledger cited no reasons or “reason to believe” as required under Rule 86A.
- Held that, the order blocking the Petitioner’s credit ledger is set aside, conditional to furnishing a bank guarantee of Rs. 6.5 crores.
- Further held that the Revenue authorities to grant a full post-decisional hearing within four months and barred them from encashing the bank guarantee until four months after the final order in the proceedings.
Our Comments:
In the case of Gujarat High Court in New Nalbandh Traders v. State of Gujarat [2022 (66) GSTL 334 (Guj)] the court quashed electronic ledger blocking order on the ground that it lacked reasons to satisfy the “reason to believe” as required under Rule 86A. It also held that, even if the reasons are cited, a post-decisional hearing needs to be given to the aggrieved party within two weeks thereafter.
In this case, it can be seen that for balance of convenience, the High Court directs Revenue to not encash the Bank guarantee until four months after it passes the decision in the proceedings before it.
The CBEC-20/16/05/2021-GST dated November 2, 2021, provides Guidelines for disallowing debit of electronic credit ledger under Rule 86A of the CGST Rules, 2017. It says that, on perusal of the rule makes it clear that the Commissioner, or an officer authorised by him, not below the rank of Assistant Commissioner, must have “reasons to believe” that credit of input tax available in the electronic credit ledger is either ineligible or has been fraudulently availed by the registered person, before disallowing the debit of amount from electronic credit ledger of the said registered person under Rule 86A.
The reasons for such belief must be based only on one or more of the following grounds:
a) The credit is availed by the registered person on the invoices or debit notes issued by a supplier, who is found to be non-existent or is found not to be conducting any business from the place declared in registration.
b) The credit is availed by the registered person on invoices or debit notes, without actually receiving any goods or services or both.
c) The credit is availed by the registered person on invoices or debit notes, the tax in respect of which has not been paid to the Government.
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 tox 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 ayailed on the strength o-f 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 19 or for claim of any refund of any unutilised amount (2) The Commissioner, or the officer authorised by him under sub-rule (l) 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.”
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
Heard. The petitioner’s Credit Ledger Account has been blocked by the respondent – G.S.T. authorities. According to learned Senior Counsel for the petitioner, the mandate of Rule 86-A has not been followed before passing the impugned order. He meant to say that, the words “reason to believe” appearing in the Rule do not reflect in the nature of reasons in support of the order impugned herein.
2. It is true that, the authorities concerned have not given any reason while the order impugned herein is passed. The Gujarat High Court, in case of New Nalbandh Traders Vs. State of Gujarat [2022 (66) GSTL 334 (Guj), has observed that, even if the reasons are cited, a post-decisional hearing needs to be given to the aggrieved party within two weeks thereafter.
3. In the case in hand, the authorities concerned appear to have issued notice/ summons, calling upon it to furnish certain documents including the documents relating to supplies made by Darwin Platforms Infrastructure Limited. The record further indicates that, the petitioner appeared in response to the notice and sought for time. The petitioner did not avail the opportunity. Be that as it may. The respondent authorities have now come around to grant the petitioner post-decisional hearing. The petitioner is ready to avail the same.
4. The learned Standing Counsel for GST authorities has relied on the judgment of the Orissa High Court in case of Transtech Solution Vs. The Commissioner Ct & GST, Banijyankar Bhawan Buxibazar, Cuttack, The Joint Commissioner of State Tax Bhubaneshwar-I Circle Bhubaneshwar [2025] 86 TAXLOK./COM 154 (Orissa) to submit that the petitioner shall cooperate with the investigating agency to take the matter to the logical end.
5. In the aforesaid factual backdrop, we are inclined to interfere with the order impugned herein. With this, the Writ Petition stands disposed of in terms of the following order :
ORDER
(i) The order 8/9/2025, blocking the Credit Ledger Account of the petitioner is hereby set aside, on condition of the petitioner furnishing Bank guarantee (from Nationalised Bank) in the sum of Rs.6,50,00,000/- (Rupees Six Crores Fifty Lakhs).
(ii) The respondent G.S.T. authorities shall grant the petitioner full opportunity to meet its case and then pass the necessary orders within a time frame of four months.
(iii) The respondent authority shall not encash the Bank guarantee until four months next after it passes the decision in the proceedings before it.
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