Revenue Department not empowered to block ITC in excess of credit available in the Electronic Credit Ledger

The Delhi High Court has ruled that the Revenue Department cannot block Input Tax Credit (ITC) beyond the amount actually available in a taxpayer's Electronic Credit Ledger (ECL). The court clarified that Rule 86A of the CGST Rules only permits blocking of ITC that is demonstrably fraudulent or ineligible and is currently present in the ECL. Blocking ITC in excess of the available credit, creating an artificial negative balance, is not permissible under the law.

The Hon'ble Delhi High Court in the case of Best Crop Sciences Private Limited v. Principal Commissioner, CGST Commissionerate, Meerut and Ors. [W.P. (C) 10980/2024 dated September 29, 2024] held that the Revenue Department is not empowered to block Input Tax Credit ("ITC")in excess of the credit available in the Electronic Credit under Rule 86A of the Central Goods and Services Tax Rules ("the CGST Rules") stating that in case where the credit of input tax is not available in the Electronic Credit Ledger ("ECL") or the credit has already been utilised, Rule 86A of the CGST Rules cannot be invoked.

Facts:

Best Crop Science Private Limited ("the Petitioner") along with other petitioners have filed writ petitions against the order passed by the Revenue Department ("the Respondent") under Rule 86A of the CGST Rules stating that the said Impugned order blocks the ITC in their ECL in excess of the credit available in their ECL, thus creating an artificial negative balance. Therefore, till the time the negative balance in the ECL of the Petitioner is not extinguished by the further addition of ITC in the ECL, the Petitioners would be disabled to utilize the ITC availed for payment of their dues. Thus, in effect only the remaining ITC, after adjustment of the negative balance would be available to the taxpayer for discharging the said tax liability.

The Petitioner has contended that Rule 86A of the CGST Rules does not permit blocking of the ITC, which would be unavailable in the Petitioner ECL.

Issue:

Whether the Revenue Department is empowered to block ITC in excess of the credit available in the Electronic Credit Ledger?

Held:

The Hon'ble Delhi High Court in the case of W.P. (C) 10980 of 2024 held as under:

• Observed that, Rule 86A(1) of the CGST Rules, stipulates that the Commissioner or any other officer authorized by him on his behalf but not below the rank of Assistant Commissioner can pass the order for disallowance of debit of an amount equivalent to such credit electronic credit ledger subject to the conditions stated herein:
• That there is credit of input tax available in the ECL
• That the commissioner or an officer authorized on his behalf has reason to believe that the credit of that the credit has been fraudulently availed or is ineligible on account of reasons set out in Clauses (a) to (d) of Rule 86A(1) of the CGST Rules i.e.

§ the credit has been availed based on invoice or debit note or any other document issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained or without receipt of goods or services or both;

§ or in case where the tax charged has not been paid to the government or the registered person availing ITC is found to be non-existent or is not in possession of a tax invoice or debit note.

• Further observed that, the term "amount equivalent to" has to be read in conjunction with the words "credit of input tax available in electronic credit ledger" wherein the aforesaid expression relates to the credit of input tax available in the taxpayer's ECL, which the Commissioner or the officer authorized by him has reasons to believe that it has been fraudulently availed or is ineligible. It does not refer to the ITC used in the past for payment of dues or which has been refunded.
• Further observed that, "Rule 86A of the CGST Rules is not a machinery provision for recovery of tax or dues under the CGST Act. It is not a part of the scheme of the machinery provisions for assessment and determination of the tax and dues as payable under the CGST Act. It is an emergent measure for protection of revenue by temporarily not allowing debit of available ITC in the ECL, which the Commissioner or an officer authorized by him has reasons to believe has been wrongfully availed", thus stating that "If at any stage the Commissioner or an officer authorized by him is satisfied that the conditions for disallowing debit no longer exists, Sub-rule (2) of Rule 86A of the Rules requires such officer to permit debit from the taxpayer's ECL. In any event, by virtue of Sub-rule (3) of Rule 86A of the Rules, the order passed under Rule 86A(1) of the Rules is operative only for a maximum period of one year from the date of passing the said order."
• Noted that, in case there is discrepancy in part ITC available in the ECL the Commissioner can freeze only related part inadmissible ITC to the extent of ITC available in the ECL.
• Relying upon para 3.3.2 and 3.4.3 of Circular No. 20/16/05/2021-GST dated November 02, 2021("the Circular") noted that, the Circular further support the literal interpretation of Rule 86A of the CGST Rules stating that the Commissioner or any officer authorized by him is empowered to block (not allowed to be debited) only to the extent of amount equivalent to the fraudulent or inadmissible ITC, has reason to believe is ineligible or fraudulently availed.
• Relying upon the judgment of the Hon'ble Gujarat High Court in the case of Samay Alloys India (P) Ltd. v. State of Gujarat [R/Special Civil Application No. 18059 of 2021 dated February 03, 2022] and Hon'ble Telangana High Court in the case of Laxmi Fine Chem v. Assistant Commissioner [W.P.No.5256 Of 2024 dated March 18, 2024], opined that, in case where the credit of input tax is not available in the ECL or the credit has already been utilised, Rule 86A cannot be invoked.
• Held that, the writ petition is allowed and the Impugned Order are set aside and disallow the debit from ECL in excess of the ITC available in ECL at the time of passing of Impugned Order.

Relevant Provision:

Rule 86A of the CGST Rules:

86A. Conditions of use of amount available in electronic credit ledger.-

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-

i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained;

or

ii. without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED