ITC Cannot be Blocked If Electronic Credit Ledger Has Negative Balance: Bombay High Court

The Bombay High Court, in a recent significant ruling, has held that ITC cannot be blocked in case the electronic credit ledger has a negative balance. Adoption of such a practice by the tax authorities is a serious violation of Rule 86A of the CGST Rules, 2017.

The tax authorities had blocked the petitioner’s ITC (Input Tax Credit) worth Rs 1.42 crore. The petitioner argued that the action has been taken without granting him a fair opportunity of hearing, reflecting a violation of the principles of natural justice as well as Rule 86A of the CGST Rules, 2017.

A show cause notice (SCN) dated July 17, 2025, was issued to the petitioner asking him the reason why ITC should not be blocked. However, the tax authority blocked the ITC on July 24, 2025, before the petitioner could respond to the notice. The petitioner claimed that tax authorities should consider valid reasons before taking any final decision.

The petitioner further argued that the blocking of ITC can only apply to the available balance in the electronic credit ledger, and in the present case the petitioner had a negative balance in his electronic credit ledger. Meaning, there was no credit available to block. To support this claim, the petitioner cited an earlier ruling of this court in a case titled Rawman Metal & Alloys vs. The Deputy Commissioner of State Tax, Thane, based on the similarity, which also highlighted the same that Rule 86A cannot be used to block future or non-existent credit.

When the High Court analysed the case, it endorsed the arguments served by the petitioner and held that blocking a negative balance is not allowed under the law and goes beyond the scope of Rule 86A. In conclusion, the court directed the tax authorities to unblock the impugned ITC amounting to Rs 1.42 crore. Allowed the appeal.