Dept. cannot Keep Credit Ledger Blocked Beyond One Year for Alleged GST ITC Fraud under Rule 86A(3): Bombay HC [Read Order]

The Bombay High Court recently affirmed that the Goods and Services Tax (GST) Department cannot continue blocking an assessee’s electronic credit ledger beyond the statutory period of one year as prescribed under Rule 86A(3) of the CGST Rules, even in cases involving allegations of fraudulent availment of Input Tax Credit (ITC).

Petitioner NZS Traders Pvt. Ltd., challenged the attachment of 4,25,75,682/- in its electronic credit ledger by the department on 16 February 2024.

The petitioner claimed that the blocked ITC was availed in compliance with the Central GST Act, 2017, and that blocking was done without issuance of a show cause notice or affording them an opportunity of hearing. It was further informed that they could not file the GSTR-3B for January 2024 due to such attachment.

Owing to these circumstances, the petitioner approached the High Court.

The petitioner, represented by Bharat Raichandani along with Bhagrati Sahu, argued that Rule 86A(3) clearly provides that any restriction imposed on the electronic credit ledger shall cease to have effect upon expiry of one year from the date of imposition. It was contended that despite the expiry of one year from the date of blocking in February 2025, the restriction continued in violation of the statutory mandate.

They relied on the decision of the Bombay High Court in Seya Industries Ltd. vs. State of Maharashtra (2024) where it was held that such restriction could not continue beyond the period of one year as under the Rule.

Karan Adik, appearing for the Revenue submitted that the petitioner’s GST registration had already been cancelled, and that unblocking of the credit would be subject to further action that may be initiated by the Department.

The Division Bench of Justice G. S. Kulkarni and Justice Aarti Sathe categorically rejected the contentions of the Department, observing that Rule 86A(3) of the CGST Rules unequivocally mandates that the restriction on the electronic credit ledger cannot continue beyond one year from the date of imposition.

Considering the statutory provision, the credit ought to have been unblocked, with the petitioner not even being required to approach this Court for a declaration to effectuate the unblocking.

Regarding the contentions on the cancellation of GST registration, it was clarified that any probable consequences arising out of cancellation of registration, including issues relating to eligibility or utilization of credit, would have to be dealt with in accordance with the provision of the GST Act and Rules.

The Bombay High Court accordingly set aside the impugned blocking of the petitioner’s electronic credit ledger dated 16th February, 2024 - the same having ceased to operate upon the expiry of one year.

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