The batch of writ petitions before the Delhi High Court involved a common controversy concerning the scope and limits of powers exercisable under Rule 86A of the Central Goods and Services Tax Rules, 2017. The petitioners, all registered taxpayers under the CGST/DGST Acts, challenged orders passed by the Commissioner or authorised officers whereby Input Tax Credit (ITC) in their Electronic Credit Ledger (ECL) was blocked in excess of the credit actually available, resulting in an artificial negative balance.

The principal grievance of the petitioners was that Rule 86A permits restriction only to the extent of ITC available in the Electronic Credit Ledger at the relevant time and does not authorise the creation of a negative balance. Such action, it was contended, effectively disables utilisation of even future valid ITC and amounts to an impermissible deprivation of property without authority of law.

The Revenue argued that Rule 86A empowers the department to block ITC equivalent to the amount alleged to have been fraudulently availed or found ineligible, irrespective of the balance available in the ECL at the time of passing the order.

The Court examined the statutory framework governing Input Tax Credit, including Sections 16, 49, and Rule 86A, and reiterated that while ITC is subject to statutory conditions, validly availed ITC constitutes a valuable and enforceable right. The Court emphasised that Rule 86A is a drastic and extraordinary measure, intended only as a temporary protective mechanism, and not a recovery provision.

On a plain and literal interpretation of Rule 86A, the Court held that the power to “not allow debit” is confined strictly to the credit available in the Electronic Credit Ledger. The Rule does not contemplate blocking of future credits nor creation of a negative balance. Any interpretation permitting such action would go beyond the express language of the Rule and result in serious civil consequences not sanctioned by law.

The Court also relied upon consistent judicial precedents, including Samay Alloys India Pvt. Ltd. v. State of Gujarat and Laxmi Fine Chem v. Assistant Commissioner, which have held that Rule 86A cannot be used to block ITC beyond the existing ledger balance. The principles laid down in Brand Equity Treaties Ltd. were also reaffirmed, recognising ITC as a vested and protected right once validly accrued.

Accordingly, the Delhi High Court held that orders passed under Rule 86A creating a negative balance in the Electronic Credit Ledger are legally unsustainable. Such actions were held to be arbitrary, excessive, and beyond the scope of the Rule. The impugned orders were set aside to the extent they blocked ITC beyond the available balance.

LINK TO DOWNLOAD THE ORDER
https://mytaxexpert.co.in/uploads/1767854177_BestCropSciencePvt.Ltd.vsPrincipalCommissionerCGSTCommissionerateMeerut.pdf 

Disclaimer
This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.