Revenue Department cannot block Electronic Credit Ledger by making negative balance

The Telangana High Court has ruled that the Revenue Department cannot block an assessee's Electronic Credit Ledger by creating a negative balance. Instead, if input tax credit has been wrongly availed, the department must pursue recovery proceedings under Sections 73 or 74 of the CGST Act. The court found that blocking the ledger with a negative amount contravenes Rule 86(A) of the CGST Rules, which only permits blocking available credit, not creating a deficit.

The Hon'ble Telangana High Court in Laxmi Fine Chem v. Assistant Commissioner [W.P No. 5256 of 2024 dated March 18, 2024] held that in case assessee has wrongly or fraudulently availed input tax credit ("ITC"), the Revenue department should initiate appropriate recovery proceedings under Section 73 or 74 of the Central Goods and Services Tax Act,2017 ("the CGST Act") rather than invoking Rule 86(A) of the Central Goods and Services Tax Rules, 2017 ("the CGST Rules").

Facts

M/s. Laxmi Fine Chem ("the Petitioner") has been informed vide an order dated February 06, 2024 ("Impugned Order") that their electronic credit ledger has been blocked by making a negative credit amount in the said ledger.

Aggrieved by the Impugned Order the Petitioner filed a writ petition before the hon'ble high court on 2 grounds:

• Firstly, that the action of blocking the ITC was without issuance of any show cause notice to the Petitioner.
• Secondly, the ITC has been blocked in contravention to the provisions of Rule 86 (A) of the CGST Rules, where the blocking can only be done so far as the input tax credit available in the electronic credit ledger of the Petitioner and could not have been by way of making negative credit.

Issue

Whether Revenue Department can block the electronic credit ledger by making negative balance?

Held

The Hon'ble Telangana High Court in W.P No. 5256 of 2024 dated March 18, 2024, held as under:

• Noted that, plain perusal of the impugned order under challenge shows that the Revenue department have made a negative credit in the electronic credit ledger of the Petitioner which otherwise is not permissible and what is permissible is only blocking the availing of the input tax credit to whatever is in credit of the Petitioner.
• Relied upon, the judgement of Gujarat High court in the case of Samay Alloys India Pvt. Ltd. [GST 338/2022 (61) G.S.T.L. 421] whereinit was held that in case where credit is fraudulently availed and utilised, appropriate proceeding under the provisions of section 73 or section 74 of the CGST Act, as the case may be. Secondly, Rule 86A of the CGST Rules is not the rule which provides for debarring the registered person from using the facility of making payment through the electronic credit ledger. In case the intention was to disallow future debits or credit in electronic credit ledger, the text of the rule would be entirely different.
• Stated that, Rule 86A of the CGST Rules, empowers the proper officer to disallow debit from the electronic credit ledger for an amount equivalent to the amount claimed to have been fraudulently availed and if no input tax credit was available in the credit ledger, the rules does not provide for insertion of negative balance in the ledger.
• Held that, the action on the part of the Revenue department in passing an order of negative credit to be contrary to Rule 86(A) of the CGST Rules.
• Set aside the impugned order.

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED BELOW