Negative Blocking of Electronic Credit Ledger Held Impermissible by HC

The Bombay High Court in Hemang Bipin Varaiya v. State of Maharashtra held that “negative blocking” of Input Tax Credit (ITC) under Rule 86A of the CGST/MGST Rules is impermissible where no credit balance is available in the Electronic Credit Ledger (ECL). A Division Bench comprising Justice G. S. Kulkarni and Justice Aarti Sathe partly quashed the order passed by the GST authorities blocking ITC of Rs. 4.82 crore against the proprietor of M/s. Mahavir Metal Industries. The Court observed:

“If there is no balance available/negative balance is available in the ECL, then the same cannot be blocked.”

The petitioner challenged the order dated 19 June 2025 passed under Rule 86A blocking ITC on allegations that the petitioner had availed credit from non-genuine suppliers whose registrations were cancelled. The department had blocked ITC of Rs. 4.82 crore and reflected a negative balance in the electronic credit ledger. The petitioner contended that the show cause notice was sent to an incorrect email address and that the impugned order was passed without properly considering the documents placed on record.

Before the High Court, the petitioner argued that Rule 86A permits blocking only to the extent of credit actually available in the ECL and does not authorise creation of a negative balance. It was submitted that on the date of blocking, the ledger already reflected a debit balance and therefore the action was contrary to law.

The State contended that an amount of Rs. 43.19 lakh was available in the ECL at the relevant time and that the blocking action was justified as the ITC was allegedly availed from non-existent suppliers. The department also submitted that adjudication proceedings would be initiated for the remaining amount.

“Rule 86A allows for the blocking of the Electronic Credit Ledger only to the extent of the credit available in it at the time of exercising the powers under Rule 86A.”

The High Court relied upon earlier decisions including Rawman Metal & Alloys v. Deputy Commissioner of State Tax and approved the view taken by the Gujarat and Delhi High Courts that Rule 86A cannot be invoked for blocking future credits or imposing “negative blocking.” The Court held that the provision must be interpreted strictly and only permits blocking of ITC actually available in the ledger on the date of the order.

Thus, the Court quashed the blocking to the extent of Rs. 4.38 crore and permitted the department to retain blockage only to the extent of Rs. 43.19 lakh available in the ECL. The department was further directed to issue a fresh show cause notice for adjudication of the remaining amount.

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