Madras HC Upholds GST ITC Blocking under Rule 86A

By vijay Ganesh Goods and Services Tax Articles September 8, 2026

Summary: The Madurai Bench of the Madras High Court in V.V. Iron Steel Company Private Limited Vs Assistant Commissioner vide order dated 05/06/2026 examined the scope of Rule 86A of the CGST Rules, 2017 in a challenge to blocking of Input Tax Credit exceeding Rs.4.10 crore in the Electronic Credit Ledger of a TMT steel bar manufacturer. The petitioner contended that the blocking was disproportionate, that any wrongdoing was attributable to suppliers, that assessment proceedings were incomplete, and that continued blocking threatened the livelihood of nearly 500 workmen. The Department relied upon findings concerning four suppliers whose premises were found vacant and lacking infrastructure necessary for supplying TMT rods or scrap, absence of corresponding vehicle movement in CCTV footage at the petitioner’s premises, and anomalies in the sequencing of weighment/receipt slips. The Court held that Rule 86A is a drastic power requiring reasons to believe supported by adequate material and reasons recorded in writing. It found that the impugned order was a speaking order containing specific findings and that the material objectively supported the Department’s conclusion that the transactions were fraudulent. The Court also rejected the proportionality argument, noting that the petitioner had annual turnover exceeding Rs.400 crore and that the block related to credit attributable to four transactions. At the same time, the Court cautioned that the Revenue could not continue the blockage indefinitely and directed that consequential proceedings be completed expeditiously. The writ petition was accordingly dismissed, with no order as to costs.

Introduction
Brief Facts
Contentions of the Petitioner
Contentions of the Revenue
Observations of the Court
Nature of the Power under Rule 86A
The Speaking-Order Requirement was Satisfied
Corroborating Red Flags at the Petitioner's Own End
No Error in Invoking Rule 86A
Proportionality and Hardship
Continued Obligation on the Revenue
Conclusion / Result
Key Takeaways for Practitioners

Introduction

The Madurai Bench of the Madras High Court has once again examined the scope of Rule 86A of the CGST Rules, 2017 – the provision that empowers tax authorities to block Input Tax Credit (ITC) lying in a taxpayer’s Electronic Credit Ledger where there is “reason to believe” that the credit was fraudulently availed or is otherwise ineligible. In this case, a TMT steel bar manufacturer challenged the blocking of ITC amounting to over Rs. 4.10 crore, arguing that the block was disproportionate, that fault (if any) lay with its suppliers rather than with it, and that the continued restriction threatened the livelihood of nearly 500 workmen. The Court, after examining the reasoned order passed by the Department, declined to interfere and dismissed the writ petition. The ruling is a useful reminder that Rule 86A relief before the High Court turns heavily on whether the blocking order is a genuinely “speaking order” backed by verifiable material – not merely on the commercial hardship the block may cause.

Brief Facts

The petitioner, a private limited company engaged in manufacturing TMT steel bars and registered under the CGST/SGST Acts, was subjected to search proceedings at its premises on 16.09.2025 and again on 14.10.2025. Following these searches, the Department blocked the petitioner’s Electronic Credit Ledger in three tranches:

Rs. 1,04,56,891/- on 26.11.2025,
Rs. 11,38,867/- on 28.11.2025, and
Rs. 89,51,695/- on 19.12.2025,
aggregating to Rs. 4,10,94,906/-.

The petitioner submitted a representation on 06.01.2026 seeking unblocking, but received no response. It first approached the High Court in W.P.(MD) No.1470 of 2026, which was disposed of on 10.02.2026 with a direction to the Department to grant a personal hearing and pass a reasoned, speaking order on the representation, either revoking the block or explaining the reasons for continuing it, in line with the Division Bench ruling in W.A. No.2341 of 2021.

Pursuant to that direction, the Department passed the impugned order dated 12.03.2026, rejecting the petitioner’s request and setting out detailed reasons for continuing the block on credit of Rs. 4,10,55,788/-. It was this order that was challenged in the present writ petition.

Contentions of the Petitioner

Counsel for the petitioner, Mr. T. Bashyam, raised the following principal contentions:

Since assessment proceedings on the underlying transactions were still incomplete, it was premature for the Revenue to characterise the transactions as “fraudulent.”
Even if certain suppliers were found not to exist at their declared premises or had passed on bogus credit, action ought to be directed against those suppliers, not the petitioner, who could not reasonably be expected to investigate every counterparty’s affairs.
Rule 86A, being analogous to a preventive-detention power, has the effect of choking business operations; continued blocking threatened to render nearly 500 workmen jobless and had brought the petitioner’s business to a virtual standstill.
Reliance was placed on Tvl. Guruvammal Tex v. Assistant Commissioner [W.P.(MD) No.21209 of 2025, dated 04.08.2025], where the Court had permitted unblocking of ITC on condition of a partial deposit, pending completion of assessment. The petitioner offered to deposit Rs. 40,00,000/- without prejudice to its rights.
The Karnataka High Court’s ruling in K-9 Enterprises v. State of Karnataka [(2024) 167 taxmann.com 499 (Kar)], which examined the scope of Rule 86A and granted relief to the assessee, was also cited in support.

The Karnataka High Court ruling in K-9 Enterprises has also been discussed by TaxGuru in the context of the procedural requirements applicable to blocking of the Electronic Credit Ledger under Rule 86A.

Contentions of the Revenue

Mr. R. Gowri Shankar, learned Senior Standing Counsel, opposed the petition on the following grounds:

This was not a case of the petitioner merely dealing with suppliers whose credentials were unverified. The block related to four specific transactions where, on inspection, the Department found no corresponding entry or exit of vehicles shown in the invoices, a finding that even the petitioner’s own CCTV footage failed to contradict.
Scrutiny of E-Way Bills and other contemporaneous records revealed sequencing anomalies inconsistent with the ordinary course of business, pointing to manipulation of records rather than mere procedural lapse.
Detailed reasons had been recorded in the impugned speaking order, and every contention of the petitioner had been specifically addressed in the counter affidavit; there was accordingly no ground to interfere with the exercise of power under Rule 86A.

Observations of the Court

Justice D. Bharatha Chakravarthy examined the rival submissions and the material on record, making the following key observations:

Nature of the Power under Rule 86A

The Court reiterated that Rule 86A empowers the Commissioner (or an officer not below the rank of Assistant Commissioner) to disallow debit of ITC where there is “reason to believe” that the credit was fraudulently availed or is otherwise ineligible, provided such reasons are recorded in writing, with the restriction operating for a maximum of one year. Being a drastic power, it must be exercised with due care and caution, supported by adequate material constituting the requisite “reason to believe,” and strictly within the statutory parameters – a position consistent with the Karnataka High Court’s ruling in K-9 Enterprises.

The Speaking-Order Requirement was Satisfied

Consistent with the earlier Division Bench dictum in W.A. No.2341 of 2021, the authority was obliged to pass a reasoned, speaking order on the petitioner’s representation. On perusal, the Court found that the impugned order did record specific findings — that four named suppliers (M/s. D.S. Traders, M/s. Ben Global Enterprises, M/s. Vinayaga Traders and M/s. Sri Murugan Traders) could not have physically supplied the goods in question, since physical verification showed their premises to be vacant and devoid of infrastructure necessary for handling TMT rods or scrap, leading the Department to conclude they were fake bill-trading entities.

Corroborating Red Flags at the Petitioner’s Own End

The Court noted that CCTV footage at the petitioner’s premises, for the dates and times when the relevant vehicles were said to have arrived, showed no evidence of their entry or exit. Additionally, weighment/receipt slips bearing higher serial numbers were recorded as received earlier than slips bearing lower serial numbers, a reversal of chronological sequence that the Court held could not be dismissed as clerical error and was indicative of subsequent manipulation of records to lend an appearance of legitimacy to non-genuine transactions.

No Error in Invoking Rule 86A

On this material, the Court held it was unable to find fault with the Department’s characterisation of the transactions as fraudulent, or with the invocation of Rule 86A. It observed that adequate material existed and that the Department’s decision reflected an objective consideration of that material.

Proportionality and Hardship

On the plea of business hardship and job losses, the Court noted that counsel for the petitioner, on query, admitted the company’s annual turnover exceeded Rs. 400 crore. In that context, the argument that the entire manufacturing unit would grind to a halt on account of blocking credit relatable to only four transactions was not accepted. The Court held that the block, being confined to the credit attributable to the four impugned transactions, was not disproportionate.

Continued Obligation on the Revenue

While upholding the block, the Court cautioned that the Revenue cannot keep the block in place indefinitely without expeditiously completing the consequential proceedings. Noting the Senior Standing Counsel’s submission that a show cause notice was imminent, the Court directed that the proceedings be carried forward and concluded as expeditiously as possible, in accordance with law.

Conclusion / Result

Finding no merit in the relief sought, the Madurai Bench of the Madras High Court dismissed the writ petition, with no order as to costs, and closed the connected miscellaneous petitions. The blocking of Input Tax Credit of over Rs. 4.10 crore under Rule 86A was accordingly allowed to continue, subject to the Revenue’s obligation to conclude the underlying proceedings without delay.

Key Takeaways for Practitioners

A Rule 86A order will withstand judicial scrutiny where it is a genuine speaking order — one that records specific, verifiable findings (mismatched E-Way Bills, absent vehicle movement corroborated by CCTV, non-existent supplier premises, sequencing anomalies in records) rather than a generic assertion of fraud.

The “supplier default is not attributable to the recipient” argument has limited traction where the Department’s findings implicate irregularities at the recipient’s own premises and records, not merely defects at the supplier’s end.

Turnover and scale of operations are relevant to a proportionality challenge, a large enterprise cannot readily argue that credit blocked in relation to a handful of transactions will bring its entire business to a standstill.

Even where the block is upheld, courts continue to hold the Revenue to the discipline of concluding assessment/adjudication proceedings expeditiously, since Rule 86A blocks are meant to be time-bound safeguards, not indefinite embargoes.

Taxpayers facing Rule 86A action should focus representations on rebutting the specific factual findings recorded by the Department (vehicle movement, CCTV, serial-number sequencing, supplier premises verification), rather than relying primarily on hardship or attribution-of-fault arguments.