High Court Quashes ITC Blockage Order under Rule 86A; Directs Restoration of Rs. 12.8 lacs

The petitioner had challenged an order issued under Rule 86A of the Central Goods and Services Tax Rules, 2017, whereby the department blocked Input Tax Credit (ITC) of Rs. 12,84,273/-. It was undisputed that at the time of passing the order, the petitioner’s electronic credit ledger showed a nil balance. The department nonetheless invoked Rule 86A, alleging that the credit was fraudulently availed and could therefore be blocked irrespective of its current availability.

It was argued on behalf of the petitioner that Rule 86A, by its very wording, contemplates blocking only the amount available in the electronic credit ledger. Since no credit existed on the date of the blocking order, the invocation was without authority of law. The department contended that the legislative intent behind Rule 86A was to prevent misuse of credit and that restricting its application only to available balances would render the rule ineffective. The court examined the rival contentions in light of the language of the provision and the precedents from other High Courts interpreting Rule 86A.

Issue Before the Court
Whether powers under Rule 86A can be invoked to block Input Tax Credit when no credit was available in the electronic credit ledger on the date of the order.

Court Decided: The Court held that under a plain interpretation of Rule 86A, the facility to block ITC can be exercised only in the case of credit that is available in the electronic credit ledger. In case such availability is absent, there is no jurisdiction to invoke the provision.

The Bench observed that fiscal statutes must be strictly construed, and where the language of a rule is clear, it is impermissible to add or infer legislative intent beyond what is expressly stated. The concept of “negative blocking,” i.e., preventing utilisation of future or non-existent credit, was held to be outside the scope of the rule. Relying on the reasoning of the Gujarat, Telangana, and Delhi High Courts and noting the Supreme Court’s refusal to interfere with those decisions, the Court preferred the literal interpretation over the purposive approach adopted elsewhere. Finding that the petitioner’s ledger reflected a nil balance on the date of the impugned order, it declared the blocking action without jurisdiction. Thus, the impugned order dated 09 December 2024 was quashed, and the department was directed to restore the blocked ITC of Rs.12,84,273/- within fifteen days. 

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