Facts of the Case

The petitioner, Milap Scrap Traders, through its proprietor, sought unblocking of input tax credit amounting to Rs. 7,68,554 of CGST and Rs. 7,68,549 of SGST, totalling Rs. 15,37,103, which had been blocked in its electronic credit ledger under Rule 86A of the CGST Rules, 2017, leaving the ledger showing a negative balance of Rs. 14,11,678. No show cause notice had been issued to the petitioner, and its representations against the blocking remained unanswered. The petition also sought consequential relief permitting the raising of e-way bills and filing of GSTR-3B returns without payment of the negative ITC, and protection from interest and penalty for delay caused by the blocking.

Issues Involved

  1. Whether Rule 86A permits the authorities to insert a negative balance in the electronic credit ledger where no input tax credit is actually available at the time of blocking.
  2. Whether the condition precedent of ‘available credit’ under Rule 86A(1) was satisfied in the petitioner's case.

Petitioner's Arguments

  • The blocking of ITC in the petitioner's ledger, which stood at Nil at the relevant time, was without jurisdiction, as Rule 86A only permits disallowing debit of credit that is actually available in the ledger.
  • The issue was covered squarely by this Court's recent decision in Samay Alloys India Pvt. Ltd. v. State of Gujarat, Special Civil Application No. 18059 of 2021, decided on 3rd February 2022, which had already ruled negative blocking impermissible.

Respondent's Arguments

  • The Revenue urged that the expression ‘equivalent to such credit’ in Rule 86A(1) did not require the credit to be ‘available,’ and that the rule permitted blocking even to the extent of a negative or future balance.

Court Order/Findings

  • Following Samay Alloys and the earlier ruling in S.S. Industries v. Union of India, (2021) 87 GSTR 71 (Guj.), the Court held that the condition precedent for exercise of power under Rule 86A is the availability of credit in the electronic credit ledger; if no credit is available, blocking and insertion of a negative balance is without jurisdiction.
  • The respondents' interpretation of ‘equivalent to such credit’ as excluding the requirement of ‘availability’ was rejected.
  • The writ application was allowed; the respondents were directed to withdraw the negative block, to the extent of Rs. 14,11,678, at the earliest.
  • Any balance remaining in the ledger after removal of the negative figure was not to be utilised until a show cause notice, if any, is issued under Section 73 or 74; thereafter the petitioner was to file returns with appropriate tax, penalty and interest as may be determined in accordance with law.

Important Clarification

  • Rule 86A empowers blocking of only existing, available credit in the electronic credit ledger; it does not authorise the department to create or extend a negative balance to pre-emptively block credit that may accrue in future.
  • Where no credit balance exists at the time of invoking Rule 86A, the block is without jurisdiction, though the department remains free to pursue adjudication and recovery under Sections 73/74 on the merits of the alleged ineligible ITC.

Sections Involved

  • Rule 86A, CGST Rules, 2017 — empowers the Commissioner to disallow debit of available but suspect input tax credit from the electronic credit ledger.
  • Sections 73 & 74, CGST Act, 2017 — the machinery for adjudicating and recovering wrongly availed or ineligible ITC.

Decision – In Favour of

In favour of the Assessee. The negative blocking of the electronic credit ledger was held without jurisdiction and ordered withdrawn, subject to the department's liberty to proceed under Sections 73/74 on merits.

Related Case Laws

No related case laws are available on this site at present for cross-reference on this specific point.

Case Details

  • Court: High Court of Gujarat at Ahmedabad
  • Case No.: R/Special Civil Application No. 12986 of 2021
  • Coram: Hon'ble Mr. Justice J.B. Pardiwala and Hon'ble Ms. Justice Nisha M. Thakore
  • Date of Order: 23rd March 2022

Link to Download the Order

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