GST ITC Blocked over Purchases from Non-Existent Dealers: Madras HC Orders to Debit 50% of 4-Months Tax Liability from Negative Block [Read Order]
The Court directed partial stay of 50% of the petitioner's tax liability. Specifically, the Court ordered that the negative blocking shall continue for ₹37,05,811 (out of ₹48,93,551) until the next date for filing returns and tax payment, and that the petitioner may debit 50% of tax liability from the blocked credit.
GST ITC Blocked - Non-Existent Dealers - Madras HC - Debit - Tax Liability - Negative Block - taxscan
GST ITC Blocked - Non-Existent Dealers - Madras HC - Debit - Tax Liability - Negative Block - taxscan
The Madras High Court recently granted partial relief to whose Input Tax Credit ( ITC ) was blocked on the allegation that the firm had availed credit on invoices issued by non-existent suppliers. The court stayed 50% of the tax liability of the assessee and directed to debit the 50% amount from the blocked ITC.
The petitioner, Red Rose Garments challenged the orders issued by the Assistant Commissioner (ST), Tiruppur North 1, directing blocking of its electronic credit ledger under Rule 86A of the CGST Rules on the ground that ITC had been availed based on invoices from Tvl. Sri Vishweshwara Knits, found to be non-existent at the time of verification.
The Court noted that the total credit blocked amounted to ₹62,33,318, based on alleged transactions with several non-existent suppliers.
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The petitioner argued that as a result of the negative blocking of ITC, it was unable to discharge tax liabilities for the period June to September 2025, accumulating arrears of ₹23,75,480, and that its returns in Form GSTR-3B for the said months could not be filed.
The Revenue contended that since ITC had been availed based on invoices from non-existent dealers, the petitioner was not entitled to such credit, and the blocking was justified.
The petitioner further submitted that notices under Sections 73 and 74 of the CGST Act had already been issued, and that the authorities could not retain the blocked ITC indefinitely.
Adv. T.Ramesh, the counsel for the petitioner, relied on the Delhi High Court’s judgment in Karuna Rajendra Ringshia Proprietor R.R. Enterprises v. Commissioner of CGST & Ors., wherein it was held that Rule 86A(1) does not empower authorities to require taxpayers to replenish their electronic credit ledger with valid ITC to the extent already utilized.
It was also noted that the Supreme Court had upheld the Delhi High Court’s decision by dismissing the Department’s Special Leave Petition on July 9, 2025.
Justice C. Saravanan observed that, considering the ongoing proceedings under Sections 73 and 74 of the Act and the necessity of balancing the petitioner’s tax liability and the protection of revenue, a partial stay of the impugned order was required.
The Court accordingly directed partial stay of 50% of the petitioner's tax liability. Specifically, the Court ordered that the negative blocking shall continue for ₹37,05,811 (out of ₹48,93,551 blocked) until the next date for filing returns and tax payment, and that the petitioner may debit ₹11,87,740 from the blocked credit.
The petitioner was also directed to replenish the blocked credit before the next due date for payment of tax.
The Court further directed the authorities to complete proceedings under Rule 86A and Sections 73/74 within 30 days, observing, “Since the matter would require further consideration, and considering the fact that petitioner is required to discharge tax liabilities to the extent of Rs.23,75,480.00 for the period mentioned above, there shall be a partial stay of the impugned order, limited to 50% of the petitioner's aforesaid tax liability.”
The writ petition was thus disposed of with partial relief.Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
