GST Rule 86A Conundrum: Interpretation Battles in High Courts

Pradyuman Joshi

Summary: The article discusses the conflicting interpretations of Rule 86A of the Central Goods and Services Tax Rules, 2017, by the Delhi and Madras High Courts. Rule 86A allows authorities to block the use of ineligible or fraudulently availed input tax credit (ITC) in the electronic credit ledger (ECL). While the Delhi High Court emphasized a literal interpretation, ruling against the creation of a negative ECL balance, the Madras High Court took a purposive approach. It allowed negative blocking, stating that the absence of explicit prohibition in the statute justifies its use. This divergence has sparked debate and confusion in the business community, as negative blocking can impede cash flow and disrupt operations. The matter is likely to advance to the Supreme Court for a definitive resolution.

Rule 86A Conundrum: Interpretation Battles in High Courts

The recent judgment of the Madras High Court in the case of Tvl. Skanthaguru Innovations Private Limited v. Commercial Tax Officer & Ors. [Writ Petition No. 29872 of 2024 dated November 28, 2024] has sparked a new debate as to whether the revenue department can make the balance of Electronic Credit Ledger (“ECL”) negative by exercising the power of Rule 86A of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”).

Before diving deep into the interpretation dispute, it is important to understand the background of Rule 86A. The GST Council in its 38th meeting has recommended inserting the said rule to block ineligible input tax credits and control the menace of fake invoices. Accordingly, the CBIC vide notification no. 75/2019-Central Tax dated December 26, 2019 which became effective from the same date. The said rule has been reproduced for your perusal.

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

i. 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.

On perusal of the said rule, it can be said that the rule enables the Competent Authority to disallow utilization of the amount of credit available in ECL for discharge of any liability for payment of tax, interest, penalty and other amounts under section 49 of the CGST Act, or to refuse the request for refund of any unutilised credit in ECL. However, the authority cannot block the ECL without having reason to believe that the registered person has availed input tax fraudulent or the credit is ineligible to him. Also, the authority needs to record such reason in writing before blocking the ECL of the registered person.

However, there are many instances, where the revenue department instead of blocking the amount available in ECL creates a negative balance in the ECL. Resultantly, till the negative balance in the ECL of the registered person is not extinguished by further addition (credit) of ITC in the ECL, the registered person is disabled to utilize the ITC availed by them for payment of their dues. Thus, in effect, only the ITC remaining after adjusting the negative balance, would be available to the registered person for discharging its dues. At first glance, the blocking of ECL and making the balance negative seems to be absurd, however it is important to understand the rationale provided by the revenue department for their act of making the balance of ECL negative.

This rule has been interpreted by High Courts with different perspective. On one hand, the Delhi High Court has given a literal interpretation, preventing revenue department from making the ledger balance negative whereas on the other hand, the Hon’ble Madras High Court justified the act of revenue by giving purposive interpretation.

Let’s try to understand the rationale of both courts, starting with Hon’ble Delhi High court.

INTERPRETATION BY DELHI HIGH COURT

In the case of M/S Best Crop Science Pvt. Ltd. v. Principal Chief Commissioner CGST [W.P.(C) 10980/2024 dated September 24, 2024], the Hon’ble Delhi High Court analysed the provision by considering the following:

(a) that utilization of credit is a vested right albeit in respect of credit that has been validly accrued;

(b) that the power under Rule 86A of the Rules is a drastic power and the same may have serious consequences for the taxpayer; and,

(c) Rule 86A of the Rules concerns the power of the Commissioner, under defined circumstances, to interdict the taxpayer from accessing its valuable resource for discharging its dues or in given cases seeking a refund. It is not a provision, which imposes a condition to be satisfied by the taxpayer for availing the ITC.

(d) Also, the court considered the judgment of CST v. Modi Sugar Mills Ltd. wherein the Hon’ble Supreme court has observed that:

“…..In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The Court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed: it cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to supply any assumed deficiency.”

INTERPRETATION OF RULE 86A

Fristly, the court examined rule’s literal meaning to check whether it leads to an anomaly or any absurdity that requires this Court to take recourse to other principles of statutory interpretation.

The court noted that, the plain reading of the opening sentence of Rule 86A(1), states necessary conditions which are to satisfied:

(a) that there is a credit of input tax available in the Electronic Credit Ledger; and,

(b) that the Commissioner or an officer authorized on his behalf has reasons to believe that the credit of input tax available has been fraudulently availed or is ineligible on account of the reasons as set out in Clauses (a) to (d) of Rule 86A(1) of the Rules.

The court observed that, if there is no credit of input tax available in the ECL, which is one of the necessary conditions for passing an order under Rule 86A(1) of the Rules would not be satisfied.

Also, the words “credit of input tax available in the electronic credit ledger” plainly refers to the credit, which is at the given point of time available in the taxpayer’s ECL. If the same had already been utilized in payment of tax, penalties or other dues, or has been refunded, the same would not be available in the ECL.

Morevoer, the court also considered the judgement of Hon’ble Gujarat High Court in the case of Samay Alloys India (P) Ltd. vs. State of Gujarat wherein the court observed that:

“Rule 86A of the CGST Rules empowers the Commissioner or his subordinates to freeze the debit in the electronic credit ledger provided he has reasons to believe that the credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible. Thus, the condition precedent is that the input tax credit should be available in the electronic credit ledger before the power under Rule 86-A is invoked by the authority. In the case on hand, it is not in dispute that the amount of input tax credit available in the electronic credit ledger as on the date of blocking of ledger was Nil. If no input tax credit was available in the ledger, the blocking of electronic credit ledger under Rule 86-A of the Rules and insertion of negative balance in the ledger would be wholly without jurisdiction and illegal.”

The court thereafter held that, there is no ambiguity in the plain language of Rule 86A of the Rules. The literal construction of the said Rule also does not lead to any absurdity, thus it is not necessary to resort to the rule of purposive interpretation. Stating that, the court allowed the writ petitions.

INTERPRETATION BY MADRAS HIGH COURT

Since, the decision of one high court is not binding on another High Court, the Madras High court had power to provide its own interpretation, for that the court directed the rule in 2 parts.

The first part of Rule 86A states that “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”.

The court noted that, the literal interpretation of this part of the provisions of Rule 86A(1) would shows that if the Commissioner or the Assistant Commissioner having reason to believe that the ITC available in ECL has been fraudulently availed or ineligible, the said ECL can be blocked under the circumstances mentioned in Rule 86A(1)(a) to (d) of GST Rules.

The second part of the rule states that “may, for the reasons to be recorded in writing, not allow debit of an amount equivalent to such credit available in electronic credit ledger for discharge of liabilities under Section 49”

Meaning that the Officers have to record the reasons in writing not to allow the debit of amount equivalent to such credit for discharge of liabilities under Section 49. The word “amount equivalent to such credit for discharge of liabilities” would mean that not only the fraudulently availed ITC amount available in the ECL, but an amount equivalent to fraudulently availed credit utilised for discharge of liabilities under Section 49.

On conjoint reading of first and second parts of Rule 86A would clearly reveal that the word “available in the ECL” referred in 1st part would mean that the amount available after the fraudulent availment of credit at any point of time, whether it was available in the ECL or utilised at the time of passing the blocking orders. In other words, if ITC was already utilised, the authorities are also empowered to pass blocking orders to the extent of amount equivalent to such credit, which was already utilised, along with the unutilised fraudulently availed ITC amount available in the ECL at the time of passing the blocking orders.

RATIONALE BEHIND THE INTERPRETATION

“The prosecuting Authorities may not have any chance to know about the wrongful availment of ITC immediately upon such availment/utilisation. It will come to their knowledge subsequently and by that time, the ITC could have been utilised by the registered person. Keeping the said aspects in mind, the Rule 86A was incorporated.”

In a Statute, if the literal interpretation of a portion of Rule which would defeat the object of the said Rule, the same has to be interpreted in entirety. In such event, if the interpretation of whole Rule exhibits the object and purpose of the legislature and beneficial for the Revenue, the interpretation of Rule in entirety will supersede the interpretation, which was made with a portion of the Rule.

Also, the court noted that the law nowhere prohibits negative blocking of ECL. When the Statute has not stated anything in the statutory term, it has to be construed that the word “blocking” includes both positive and negative blocking. If the intention of the legislature is not to allow the negative blocking, they are supposed to have specifically prohibited the same by virtue of proviso or otherwise. In this case, no such prohibition is available and hence, in the absence of any such prohibition for negative blocking, the blocking referred in Rule 86A has to be construed for both positive and negative blocking.

Conclusion

The purposive interpretation by the Hon’ble Madras High Court has spiked confusion among trade and industry. Negative blocking of the ECL not only creates hurdles in filing returns but also disrupts the cash flow of businesses.

As the saying goes, “With great power comes great responsibility.” Therefore, it is crucial for the revenue department to exercise the powers granted under Rule 86A judiciously and only in cases where it is absolutely necessary. Nevertheless, the judgment of the Hon’ble Madras High Court is likely to spark further litigation, with this interpretational dispute potentially reaching the apex court for final resolution.