GST ITC Blocking allowed Even with Zero ITC Balance in ECL: Madras HC delivers Detailed Interpretation of Rule 86A [Read Order]

The Madras High Court has ruled that the Input Tax Credit ( ITC ) under the GST ( Goods and Services Tax ) can be blocked even with zero ITC balance in the Electronic Credit Ledger (ECL). It was clarified that the negative blocking can continue up to the stage of accumulation of ITC to the extent of wrongful availment of credit in the ECL. Justice Krishnan Ramasamy delivered a detailed interpretation of Rule 86A of GST Rules, 2017 in his judgment. While interpreting the Rule, he stated that “... the right way of interpretation of Rule 86A of GST Rules, 2017, is as to whether the fraudulently availed credit was made available for the payment of output tax liabilities at any point of time subsequent to the said fraudulent availment. Thus, the Rule 86A would apply to pass blocking orders by the State Authorities to the extent of fraudulently availed credit in ECL, whether it is available at the time of passing the blocking orders or not. If any amount is credited to the ECL subsequently, to the extent of amount mentioned in the blocking orders, the ECL cannot be debited. The State Authorities, through intimations dated 24.06.2024, 09.09.2024, and 10.09.2024, issued ITC blocking orders under Rule 86A of the GST Rules, 2017. The petitioners, Skanthaguru Innovations, argued before the Court that these blocking orders were issued despite there being no balance in their ECL at the time, with the ITC position recorded as "Nil." Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here Consequently, the petitioners contended that the blocking orders violated the provisions of Rule 86A and contradicted legal precedents set by the Division Benches of the Gujarat High Court and the Delhi High Court. The court analysed the situation and the Rule 86A. Reading the Rule, it stated that if the Commissioner or an Officer, not below the rank of Assistant Commissioner, having reason to believe that the credit of ITC available in ECL has been fraudulently availed or ineligible under the circumstances mentioned in Clauses (a) to (d) of Rule 86A(1) of GST Rules, for the reasons to be recorded in writing, not allow the debit of amount equivalent to such credit in ECL for discharge of any liability under Section 49 of the GST Act. The petitioner, referred to Samay Alloys case of Gujarat High Court, where it was ruled that ‘....If no input tax credit was available in the ledger, the blocking of electronic credit ledger under Rule 86A of the Rules and insertion of negative balance in the ledger would be wholly without jurisdiction and illegal.” It also relied on the decision of Delhi HC in Best Crop case. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here The bench stated that though the Division Bench of Gujarat and High Court of Delhi had already analysed the first part of the provisions of Rule 86A alone, this Court feels that it would be appropriate to analyse the said Rule 86A once again in whole. The bench, reading both parts of Rule 86A together, concluded that "available in the ECL" includes both fraudulently availed ITC still in the ECL and ITC already used for liabilities. Thus, the authorities are empowered to block the debit of an amount equivalent to fraudulently availed credit, whether unutilized or already utilized for discharging liabilities. The court noted that interpreting Rule 86A of the GST Rules, 2017, must concur with its purpose. The Gujarat and Delhi High Courts had focused solely on the first part of the Rule, but a combined reading of both parts clarifies that the "amount available in the ECL" includes fraudulently availed ITC, whether or not it was utilized. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here In the present case, the fraudulently availed ITC of ₹13.10 Crores was entirely utilized. However, the State Authorities blocked only ₹2.48 Crores through orders dated 24.06.2024, 09.09.2024, and 10.09.2024. Rule 86A allows blocking ITC even when it has been utilized, ensuring that fraudulently availed ITC remains restricted from future debit. The High Court noted that prosecuting authorities often discover wrongful ITC availment only after its utilization. Rule 86A addresses this by permitting blocking orders even when the ECL balance is zero, extending to amounts fraudulently availed and later accumulated. Importantly, the Rule's intent is to safeguard revenue and prevent misuse of ITC by disallowing its debit post-detection. Contrary to arguments against "negative blocking," the court held that Rule 86A allows both positive and negative blocking. The absence of explicit prohibition in the Rule supports this interpretation. Additionally, the Rule's objective overrides a purely literal interpretation, mandating a purposive approach to uphold its intent. Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here Justice noted that “In a Statute, if the literal interpretation of a portion of Rule which would defeat the object of the said Rule, the same has to be interpreted in entirety. In such event, if the interpretation of whole Rule exhibits the object and purpose of the legislature and beneficial for the Revenue, the interpretation of Rule in entirety will supersede the interpretation, which was made with a portion of the Rule.” When a literal interpretation of a rule conflicts with its intended purpose, especially in a tax statute, the court must interpret it purposely to align with the statute's objectives. Rule 86A of the GST Rules was designed to prevent the debiting of fraudulently availed ITC from the ECL, particularly in cases involving bogus invoices and similar fraudulent activities. The rule aims to prohibit debiting ITC to the extent of wrongful credit. Therefore, it is clear that blocking orders can still be issued even when the ECL has a zero balance, as negative blocking can continue until the ECL accumulates the fraudulent credit, clarified the bench. Thus, the court concluded that State Authorities are empowered to block ITC equivalent to the fraudulently availed amount, regardless of ECL balance at the time. In this case, they could block up to ₹13.10 Crores. The decisions of the Gujarat and Delhi High Courts were not followed as they did not consider the latter part of Rule 86A. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates

GST ITC Blocking allowed Even with Zero ITC Balance in ECL: Madras HC delivers Detailed Interpretation of Rule 86A [Read Order]

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GST ITC Blocking allowed Even with Zero ITC Balance in ECL: Madras HC delivers Detailed Interpretation of Rule 86A [Read Order]

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