Facts of the Case

King Enterprises challenged a communication/order dated 8 January 2025, purportedly issued under Rule 86A of the CGST Rules, 2017, blocking Input Tax Credit in its electronic ledger to the extent of Rs.2.66 crore. As on the date of the order, the actual ITC available in the petitioner's electronic ledger was only Rs.7,06,770, meaning the order created a "negative blocking" for the amount exceeding that balance. The department defended the blocking, contending Rule 86A permits blocking even beyond the available balance, treating the excess as a "lien," relying on the Allahabad High Court's ruling in R.M. Dairy Products LLP vs. State of U.P.

Issues Involved

  1. Whether Rule 86A permits the department to block ITC in a taxpayer's electronic credit ledger by an amount exceeding the credit actually available on the date of the order (negative blocking).
  2. Whether such blocking can be justified on a "lien" theory attaching to future credit entries.

Petitioner's Arguments

  • The impugned order sought to block ITC of Rs.2.66 crore when only Rs.7,06,770 was available in the ledger, amounting to unauthorized negative blocking.
  • Relied on Samay Alloys India (Gujarat HC), Laxmi Fine Chem (Telangana HC), Best Crop Science and Karuna Rajendra Ringshia (Delhi HC), and the Bombay High Court's own decision in Rawman Metal & Alloys vs. Deputy Commissioner of State Tax, Thane, all holding negative blocking ultra vires Rule 86A.
  • Did not object to blocking to the extent of the actually available Rs.7,06,770.

Respondent's Arguments

  • Defended the blocking based on the Principal Commissioner's affidavit, arguing Rule 86A permits blocking of fraudulently availed/utilized ITC even in excess of the ledger balance, treating the excess as a lien attaching to future credit entries.

Court Order / Findings

  • Following its own decision in Rawman Metal & Alloys (which had already rejected the "lien" theory after surveying the Gujarat, Telangana and Delhi High Courts' rulings and noting dismissal of related SLPs by the Supreme Court), the Court held the department's negative-blocking argument could not be accepted.
  • The impugned order was quashed and set aside to the extent it purported to block ITC beyond Rs.7,06,770, restricting the blocking strictly to the amount actually available in the ledger.
  • A consequential writ of mandamus was issued directing the department to unblock the excess ITC within 15 days of the order being uploaded; the Rule was made partly absolute with no order as to costs.

Important Clarification

  • Rule 86A does not permit "negative blocking" of a taxpayer's electronic credit ledger — the power to disallow debit under the rule is capped at the credit actually available on the date of the order.
  • It cannot be stretched into a lien over future, as-yet-uncredited ITC; this is now the settled position across the Gujarat, Telangana, Delhi and Bombay High Courts (with related Supreme Court SLPs dismissed), notwithstanding a contrary view from the Calcutta and Allahabad High Courts.

Sections Involved

  • Rule 86A, CGST Rules, 2017 — power to restrict debit from the electronic credit ledger where the Commissioner has reason to believe ITC has been fraudulently availed or is ineligible, subject to the credit being actually available.
  • Section 16, CGST Act, 2017 — conditions for eligibility of ITC, background to the alleged fraudulent availment.
  • Section 73/74, CGST Act, 2017 — the proper machinery for actual recovery of wrongly availed ITC, distinguished from the interim, non-recovery nature of Rule 86A blocking.

Decision – In Favour of

The decision is in favour of the assessee. The blocking order was quashed to the extent it exceeded the available ITC balance, with a mandamus for unblocking the excess.

Case Details

Court: High Court of Judicature at Bombay, Civil Appellate Jurisdiction
Case No.: Writ Petition No. 5094 of 2025
Coram: Hon'ble Justice M.S. Sonak and Hon'ble Justice Advait M. Sethna
Date of Order: 18 November 2025

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