GST ITC Blocked for Purchases from Non-Existent Dealers: Madras HC Orders 50% Debit

Tvl. Red Rose Garments Vs Assistant Commissioner (Madras High Court)

The petitioner, Tvl. Red Rose Garments, filed a writ petition challenging the impugned order dated 01.07.2025 / 08.07.2025, which directed the blocking of its Electronic Credit Ledger (ECL) under the GST regime. The order was issued on the basis that the petitioner had allegedly availed Input Tax Credit (ITC) on purchases from certain non-existent suppliers, including Tvl. Sri Vishweshwara Knits, Tiruppur, which was found to be a non-existent entity during verification. Consequently, ITC availed through invoices from this and other dealers was treated as ineligible.

The impugned order listed several dealers and detailed the transactions between June 2019 and August 2024, identifying multiple taxpayers who had availed ITC from the said non-existent supplier. The total credit blocked for the petitioner amounted to Rs. 62,33,318, corresponding to the tax amounts for the assessment years 2022–23 (Rs. 31,70,884), 2023–24 (Rs. 28,42,176), and 2024–25 (Rs. 2,20,258). Notices in Form GST DRC-01 and DRC-01A were issued to the petitioner, who submitted replies, and the matter was listed for hearing before the GST authorities on 22.10.2025.

The petitioner’s counsel submitted that on the date of the ledger blocking, a balance of Rs. 14,20,766 was lying in the ECL, and the remaining amount of Rs. 48,93,551 had been negatively blocked. This blocking, according to the petitioner, made it impossible to discharge tax liabilities for the period June–September 2025, resulting in tax arrears of Rs. 23,75,480. The petitioner also stated that due to this situation, it could not upload GSTR-3B returns for those months, leading to continued default.

The respondent authority, represented by the Government Advocate, argued that since the petitioner had availed ITC based on invoices issued by non-existent dealers, it was not entitled to claim ITC, and therefore the blocking of the credit ledger was justified. The respondents further submitted that since the petitioner had already responded to the notices, it should await the final adjudication under the GST proceedings.

In support of its case, the petitioner relied on the Delhi High Court’s decision in Karuna Rajendra Ringshia v. Commissioner of CGST (W.P. (C) 7250/2024) dated 21.10.2024, which held that authorities must proceed under Sections 73 and 74 of the CGST Act for determining any amount due. The Delhi High Court had ruled that Rule 86A(1) does not authorize the authorities to require a taxpayer to replenish the ECL with valid ITC equivalent to previously utilized credit. Such an interpretation, the Court held, would amount to recovery of tax without following due process under the Act. The petitioner also submitted that the Supreme Court, on 09.07.2025, had dismissed the department’s Special Leave Petition (Diary No. 21136/2025) challenging this Delhi High Court ruling, thereby upholding its view.

The Madras High Court, after considering submissions from both sides, observed that the issue required further consideration. However, given that the petitioner was unable to meet tax obligations amounting to Rs. 23,75,480 for June–September 2025 due to the blocking of ITC, the Court deemed it appropriate to grant partial relief. Accordingly, the Court ordered a partial stay of the impugned order, allowing the petitioner to debit 50% of the tax liability for the four-month period from the blocked ECL balance.

The Court clarified that the negative blocking would continue for Rs. 37,05,811 (i.e., Rs. 48,93,551 minus Rs. 11,87,740), and the petitioner would be entitled to debit Rs. 11,87,740 from the blocked amount towards discharge of tax liabilities. This arrangement would remain effective until the next date of filing monthly returns and payment of tax, pending further proceedings.

In essence, while the High Court refrained from fully setting aside the department’s order blocking ITC, it granted interim relief by permitting partial utilization of the blocked credit, thereby balancing the protection of revenue with the taxpayer’s operational needs.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

In this Writ Petition, the petitioner has challenged the impugned order dated 01.07.2025 / 08.07.2025 issued by the 1^st respondent, directing the 2nd respondent to block the Electronic Credit Ledger of the petitioner.

2. The aforesaid impugned Order dated 01.07.2025 / 08.07.2025 reads as under:

“I submit that to Tvl.SRI VISHWESHWARA KNITS (33ANCPP8191N1ZF), Tiruppur Arrear Rs.2,82,41,714/- is a non existent person at the time place verification and effected inward supplies and availed ITC and passed on ITC to same dealers (effected purchase and sales to same dealers). The following tax payers who are active / in active in GST have effected purchases from the non existent person and availed Input Tax Crredit as per GSTR-1 filed by Tvl.SRI VISHWESHWARA KNITS (33ANCPP8191N1ZF), Tiruppur as below:

Hence the above ITC may be locked and further action may be taken against the above beneficiary.

3. The total amount of credit that is sought to be blocked by the impugned Order is Rs.62,33,318/-, and is based on the ground that petitioner made purchases from various suppliers who did not exist.

4. As on date, the petitioner has also been issued with notices as detailed below:

5. It is also informed by the learned counsel for the petitioner that petitioner has replied to the notices, and the case is listed for hearing before the respondents on 22.10.2025.

6. Learned counsel for the petitioner would further submit that on the date of blocking, a sum of Rs.14,20,766/- was lying in the petitioner’s Electronic Credit Ledger and that still there is a negative blocking for balance sum of Rs.48,93,551/-.

7. Learned Counsel for the petitioner would further submit that in view of the blocking of the Electronic Credit Ledger, the petitioner was unable to discharge the tax liabilities for the period between June to September 2025, and in all, the petitioner has arrears of Rs.23,75,480.00 as detailed below:

8. Learned counsel for the petitioner would further submit that petitioner has to upload returns for the period between June 2025 to September 2025 and that petitioner continues to be in default, as petitioner was unable to upload the returns in Form GSTR-3B for the above said period.

9. Learned Government Advocate appearing for the respondents would submit that since the petitioner has availed input tax credit on the basis of invoices raised by non existing dealers, petitioner was not entitled to input tax credit, and therefore, there is no merit in the present writ petition.

10. That apart, it is submitted that petitioner has replied to the notice issued in Form GST DRC 01 dated 01.09.2025 for the tax period 2023-2024 and also the notices issued in Form GST DRC-01A dated 31.07.2025 for the tax period 2022-2023 and 2024-2025 and that petitioner can await for the orders to be passed.

11. It is noticed that the Delhi High Court, in its Order in W.P.(C) 7250/2024 dated 21.10.2024 in the case of KARUNA RAJENDRA RINGSHIA PROPERIETOR R R ENTERPRISES v. COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX & ORS., has held that the respondents are entitled to proceed under Sections 73 and 74 of the respective GST enactment, for determination of the amount due and that Rule 86A(1) of the Rules does not contemplate an order, the effect of which is to require a taxpayer to replenish his Electronic Credit Ledger with valid availment of ITC, to the extent of ITC used in the past.

12. Specifically, a reference was made to the above said decision and the relevant portion is extracted hereunder:

“81. As noted above, the revenue authorities are required to proceed under Sections 73 and 74 of the CGST Act for determination of the amount due. After the proceedings under Chapters XII, XIV and XV of the CGST Act have commenced and the Commissioner is of the opinion that for the purpose of protection of government revenue, it is necessary to do so, he may pass an order under Section 83(1) of the CGST Act, provisionally attaching any property including the bank account of a taxpayer. This is also one of the measures that may be resorted to pending conclusion of the proceedings.

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.”

13. It is further submitted by the learned counsel for the petitioner that the aforesaid decision of the Delhi High Court has also been upheld by the Hon’ble Supreme Court, by dismissing the department appeal on 09.07.2025 in Special Leave Petition (Civil) Diary No(s). 21136/2025.

14. On the other hand, learned Government Advocate for the respondents would submit that there are no valid grounds to interfere with the impugned order and that there cannot be any negative blocking of the credit.

15. Since the matter would require further consideration, and considering the fact that petitioner is required to discharge tax liabilities to the extent of Rs.23,75,480.00 for the period mentioned above, there shall be a partial stay of the impugned order, limited to 50% of the petitioner’s aforesaid tax liability.

16. In other words, the negative blocking shall continue for a sum of Rs.37,05,811/- (48,93,551 – 11,87,740) till the next date of filing of monthly return and payment of tax. The petitioner will be entitled to debit a sum of Rs.11,87,740/- alone from the aforesaid block credit of Rs.48,93,551/-. The petitioner shall replenish the aforesaid block credit of Rs.48,93,551/- before the next due date for payment of tax for the ensuing month. The negative blocking shall continue either an order passed under Rule 86(2) or an order passed under Rule 86A of the respective GST enactments.

17. Meanwhile, the respondents shall also endeavour to pass such orders as expeditiously as possible, preferably, within a period of 30 days from the date of receipt of a copy of this order both under Rule 86A and under Section 73 / 74 as the case may be.

18. With the above observations, this Writ Petition stands disposed of. Consequently, connected miscellaneous petitions are closed. No costs.