The Punjab & Haryana High Court, in Mannat Steels v. Union of India, examined the legality of blocking Input Tax Credit (ITC) under Rule 86A of the CGST Rules when the taxpayer’s Electronic Credit Ledger (ECL) had little or no balance. The petitioner challenged the department’s action of creating a negative blocking entry, arguing that Rule 86A only authorizes restriction of ITC actually available in the ledger and not beyond it. The Court held that Rule 86A is a preventive provision intended to temporarily restrict the use of existing credit suspected to be ineligible, but it does not permit blocking ITC in excess of the available balance or creating a negative ledger. The Court further emphasized that eligibility of ITC and recovery of tax liabilities must be determined through proper adjudication under the statutory machinery, and not through arbitrary ledger blocking. This made the negative blocking action legally unsustainable.
Facts:
The petitioner’s Electronic Credit Ledger (ECL) was blocked by GST authorities under Rule 86A even though the ledger had a nil ITC balance, resulting in a negative blocking entry of ₹8,00,164/-. The petitioner challenged this action before the Punjab & Haryana High Court.
Key Legal Issue:
Whether Rule 86A of the CGST Rules permits blocking of ITC in the ECL beyond the actual balance available (i.e., creating a negative credit ledger balance), and whether such action can be taken without prior notice and without statutory adjudication.
High Court’s Findings
📌 1. Rule 86A Only Permits Blocking of Available ITC
The Court held that the power under Rule 86A can be exercised only if ITC is actually available in the electronic credit ledger at the time of the blocking order. The rule does not authorize authorities to create a negative balance by blocking more credit than what exists.
✔ The conditions for invoking Rule 86A include:
- Actual credit available in the ECL;
- The officer must have reason to believe that the credit was fraudulently availed or is ineligible;
- Such reasons must be recorded in writing.
📌 2. Negative Blocking Is Beyond Jurisdiction
Blocking ITC resulting in a negative ledger balance when there was no available ITC at the time of the order is ultra vires (beyond legal authority) and therefore illegal. The Court noted that Rule 86A is a preventive provision – meant to temporarily restrict use of credit suspected to be ineligible – not a mechanism for permanent tax recovery.
📌 3. Procedural Safeguards and Recovery Routes
The Court emphasized that:
- Rule 86A does not replace the statutory recovery process under Sections 73/74 of the CGST Act, which is the appropriate route for adjudicating ineligible or fraudulently availed ITC;
- Blocking without ITC availability and without adjudication violates principles of natural justice.
Implications of the Judgment
🔹 Negative Blocking Not Permissible:
Authorities cannot block more ITC than the existing balance; doing so artificially restricts genuine credit and disrupts the taxpayer’s ability to discharge liabilities lawfully.
🔹 Rule 86A Is Not a Tool for Recovery:
Blocking of credit under Rule 86A is a preventive measure, not a substitute for formal adjudication and recovery proceedings.
🔹 Procedural Requirements Must Be Followed:
Even in cases where blocking is justified, the authority must record written reasons for its belief that the ITC is ineligible before issuing a blocking order. (This is also noted in related High Court decisions on Rule 86A procedural safeguards – though not part of this specific Taxmann report).
Legal Context: Broader Rule 86A Interpretation
This approach aligns with other High Court and Supreme Court decisions interpreting Rule 86A in 2025:
✅ Supreme Court upheld that blocking cannot be arbitrary or in excess of available credit, reinforcing that negative blocking is not permissible.
✅ Bombay HC held that if the credit ledger shows nil balance, Rule 86A powers cannot be invoked to block credit.