The Madurai Bench of the Madras High Court, in the case of Tvl. Guruvammal Tex v. Assistant Commissioner (ST)-II & Ors. [W.P.(MD) No. 21209 of 2025], examined the legality of blocking Input Tax Credit (ITC) under Rule 86A of the CGST Rules, 2017. The petitioner challenged the order of the Commercial Tax Department dated 25.03.2025, which blocked ITC worth ₹43.58 lakh from its Electronic Credit Ledger (ECL) on the allegation of availing ineligible credit. The case highlighted the tension between revenue protection and taxpayer’s right to liquidity, with the Court ultimately balancing both interests by directing conditional unblocking of the ITC upon a deposit of ₹5 lakh and mandating adjudication within three months.

Madras HC: Conditional unblocking of ITC blocked u/r 86A; deposit ₹5,00,000 and complete adjudication in 3 months

Case

Tvl. Guruvammal Tex v. AC (ST)-II & Ors.
W.P.(MD) No. 21209 of 2025 — Madurai Bench, Madras High Court
Coram: C. Saravanan, J.
Impugned action: Blocking of ₹43,58,856 from ECL under Rule 86A; SCN DRC-01 dated 23-04-2025; replies on 24-05-2025, 24-06-2025, 26-06-2025, 01-07-2025.

Background & Petitioner’s case

The department blocked ₹43.58 lakh ITC in the Electronic Credit Ledger invoking Rule 86A, alleging ineligible credit tied to purchases from M/s International Enterprises. The taxpayer says 86A was invoked without adequate reasons, transactions were genuine, invoices were on record, and entries appeared in GSTR-2A. The SCN followed later via DRC-01 (23-04-2025), to which multiple replies were filed. Business operations were said to be severely affected by the freeze.

Issues

Whether continued negative blocking of ECL u/r 86A was justified pending adjudication.
What interim arrangement best protects revenue while mitigating hardship to the taxpayer.

Court’s observations (gist)

86A is an extraordinary, revenue-protective measure that impacts working capital; use must be calibrated and accompanied by timely adjudication. (This approach aligns with CBIC Guidelines on Rule 86A and the statutory one-year sunset in Rule 86A(3).)
Given that the department has already issued SCN and the assessee has filed detailed replies, the matter should now be decided expeditiously with a personal hearing.

Operative directions

The High Court balanced equities and ordered:

Deposit ₹5,00,000 (cash) by the petitioner.
Immediate unblocking of the ₹43.58 lakh ITC in the ECL after the deposit.
The department shall pass final orders within 3 months from the date the court order is produced, after granting a personal hearing and considering the replies already filed.

Why this matters (doctrinal context)

Statutory cap / sunset: Rule 86A(3) says the restriction ceases after 1 year from imposition. Courts routinely remind authorities not to treat 86A as an open-ended freeze.
Post-appeal landscape (related line of cases): Madras HC in Arise Steels (P.) Ltd. held that once appeal u/s 107 is filed with the 10% pre-deposit, 86A restriction should not continue, following New Royal Traders. While Guruvammal Tex is at the pre-adjudication stage (not yet in appeal), the Court uses a conditional-unblock model to protect revenue and restore liquidity—consistent with the broader trend against prolonged 86A blocks.
Administrative guardrails: CBIC’s Rule 86A Guidelines demand “reasons to believe,” recording of reasons, proportionality, and urge completion of investigation/adjudication within the restriction period—mirrored by the Court’s insistence on a 3-month decision timeline.

Practical takeaways

For taxpayers:
- If ITC is blocked u/r 86A pending SCN/adjudication, seek judicial intervention for time-bound adjudication and conditional unblocking (e.g., modest cash deposit). Keep invoices, e-way bills, GSTR-2A/2B reconciliations handy.
- Track the one-year outer limit under Rule 86A(3); if crossed, seek lifting of the block even apart from the merits.
For officers:
- Ensure recorded reasons and proportionality while invoking 86A; move swiftly to adjudicate so that the protective block does not morph into an indefinite restraint.

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