In a significant development for GST-registered businesses, the Madras High Court has directed the GST authorities to consider a representation filed by M/s A. J. Power Center seeking the unblocking of its Electronic Credit Ledger (ECL). The ledger had been blocked under Rule 86A of the CGST Rules following allegations that the company availed Input Tax Credit (ITC) from dealers who were allegedly non-existent.
Background of the Case
The matter arose after A. J. Power Center, engaged in the wholesale business of batteries and inverters, was subjected to an inspection under Section 67 of the Tamil Nadu Goods and Services Tax Act, 2017 by the GST Intelligence Wing. Following this inspection, the Deputy Commissioner (ST) issued notices alleging that several suppliers of the petitioner were non-existent, leading to the blockage of the company’s ECL.
Subsequently, a show-cause notice (SCN) in Form GST DRC-01 was served on February 26, 2025, accusing the company of wrongly claiming ITC on purchases from these alleged non-existent suppliers. In response, A. J. Power Center submitted a detailed reply on the same day, asserting that:
- All goods were received along with proper tax invoices.
- Full payment, including applicable GST, was made to the suppliers.
- The corresponding outward supplies were duly reported by the suppliers in their GST returns.
Assessment Order and Legal Challenge
Despite the petitioner’s submissions, the GST department passed an assessment order under Section 74 on March 7, 2025, disallowing the ITC and raising a tax demand. However, the ECL remained blocked even after the issuance of the order.
To resolve the matter, the petitioner submitted a formal representation on March 13, 2025, requesting the unblocking of its electronic credit ledger under Rule 86A. As no action was taken on this representation, the petitioner approached the Madras High Court by filing a writ petition.
High Court’s Direction
Upon hearing the matter, the Madras High Court chose to dispose of the writ petition at the admission stage. The Court directed the Deputy Commissioner (first respondent) to consider the pending representation dated March 13, 2025, on its own merits and in accordance with the provisions of law.
The Court also set a timeframe of three weeks from the date of receipt of the court order for the respondent to complete the evaluation and take a decision.
Legal Significance of Rule 86A
Rule 86A of the CGST Rules empowers tax authorities to block ITC if there is a “reason to believe” that the credit has been fraudulently availed or is otherwise ineligible. Grounds for blocking include transactions with:
- Non-existent suppliers,
- Suppliers not operating from their registered place of business,
- Transactions where no actual goods or services are received.
However, courts have repeatedly emphasized that the power under Rule 86A must be exercised with tangible material evidence, and that such belief must ideally be recorded in writing. Moreover, blocking under Rule 86A is meant to be temporary, with a maximum duration of one year, unless otherwise justified.
Implications for Businesses
This case underscores the challenges faced by businesses when their Input Tax Credit is blocked, particularly in scenarios where allegations are made against the suppliers rather than the recipient. The blocking of the ECL can severely hamper a business’s liquidity and tax compliance capabilities.
By directing the GST authorities to formally consider the petitioner’s representation, the Madras High Court reinforced the principles of natural justice and due process, ensuring that the taxpayer’s claims and evidence are given a fair hearing.
Conclusion
The outcome of this case will be crucial in determining whether A. J. Power Center’s blocked ITC will be restored. It also sets a precedent for other businesses facing similar issues under Rule 86A of the GST Rules. The ruling highlights the importance of documentary compliance, the right to representation, and the judicial oversight available to taxpayers challenging administrative actions.
Case Title: A J Power Center vs. Deputy Commissioner (ST)