Rule 86A: When Does ITC Blocking Impair the Statutory Right to Credit?

Against this backdrop, Rule 86A of the CGST Rules, 2017 empowers the department to restrict utilisation of such credit in specified circumstances. While the intent is clearly to address fraudulent claims, its increasing invocation raises a larger and more nuanced concern - when does blocking of ITC begin to impair a taxpayer’s entitlement?

The issue arises where such blocking is undertaken without a proper basis, without disclosure of reasons, or in a manner that goes beyond what the rule itself permits. At that stage, a provision meant to safeguard revenue begins to interfere with a statutory right.

Rule 86A allows the Commissioner or an authorised officer to block ITC where there are “reasons to believe” that the credit has been fraudulently availed or is otherwise ineligible. This is not a mere formality. The belief must be supported by clear material on record and must reflect application of mind.

The power is also time-bound. The restriction cannot continue beyond one year, showing that it is a temporary measure and not a substitute for final determination.

In practice, this power is often invoked in cases involving suspected fraudulent credit, particularly where invoices are issued without actual supply. This aligns with Circular No. 171/03/2022–GST issued by the CBIC, which treats such credit as inherently suspect and liable to recovery along with penal consequences. Seen in this light, Rule 86A operates as an interim safeguard where the credit itself is under serious doubt, pending proper adjudication

What makes Rule 86A particularly significant is its position within the statutory scheme. While Section 16 grants the right to avail ITC, it does not expressly provide for blocking of credit once availed. Rule 86A, introduced through delegated legislation under Section 164, nevertheless enables such restriction.

This raises an important question - can delegated legislation limit a right recognised under the parent statute?

The concern becomes more serious where ITC is blocked even before any proper determination is made under the Act. In such situations, restriction precedes adjudication.

Courts have consistently imposed conditions on how this power is to be exercised. These decisions are important in identifying when the use of Rule 86A begins to affect the taxpayer’s right to utilise credit.

The Madras High Court in HEC India LLP held that blocking of ITC cannot be sustained unless the reasons are communicated to the assessee, ensuring a meaningful opportunity to respond.

The Allahabad High Court in M/s Pilcon Infrastructure Pvt. Ltd. held that ITC cannot be blocked on vague alerts or general allegations, and that “reasons to believe” must be supported by concrete material and recorded in writing.

The Karnataka High Court in Bee Jay Engineers clarified that the authority must form its own reasoned view and cannot rely blindly on external reports.

Taken together, these decisions show that Rule 86A is not a routine administrative power. It can be exercised only where there is clear material and proper application of mind.

These limitations further clarify when the exercise of power crosses into impairment of rights.

In M/s Mannat Steels, the Punjab and Haryana High Court held that ITC cannot be blocked beyond what is available in the electronic credit ledger. Creating a negative balance is not permitted, and recovery must follow the statutory route under Sections 73 or 74.

The Delhi High Court has taken a similar view, holding that Rule 86A cannot be used to block credit in excess of what is available at the time of the order.

Courts have also strictly enforced the one-year limit. The Karnataka High Court in Jupiter Ventures reiterated that the restriction cannot continue beyond one year. Re-blocking after expiry of this period, without fresh material, has also been held to be unsustainable.

The issue also arises in situations where ITC continues to remain blocked even after the matter has moved to the appellate stage. This becomes relevant in determining whether continued restriction is justified.

The Madras High Court in Arise Steels Pvt. Ltd. held that once an appeal is filed and the statutory pre-deposit is made, continued blocking of ITC is not justified.

On the question of authority, the Orissa High Court in Atulya Minerals clarified that officers not below the rank of Assistant Commissioner, including Deputy Commissioners, are competent to exercise power under Rule 86A, provided the statutory requirements are satisfied.

In practice, blocking of ITC is not merely procedural. It directly affects working capital and can disrupt business operations. This becomes particularly serious where credit is blocked due to issues at the supplier’s end, even though the transaction itself is genuine.

In such cases, ITC blocking begins to impair the taxpayer’s right, as utilisation is restricted even before any final determination is made.

Conclusion

Rule 86A operates at a delicate balance between revenue protection and taxpayer rights. The issue is not the power itself, but how it is used.

Blocking of ITC begins to impair the statutory right when it is exercised without material basis, without disclosure of reasons, without independent application of mind, or in a manner that goes beyond the limits built into the rule, including the one-year restriction.

Where these safeguards are followed, the provision functions as a preventive measure. Where they are not, it risks restricting a statutory right without due process.

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