ITC Blocking Under Rule 86A Cannot Exceed Available Balance in Electronic Credit Ledger: Delhi HC

Delhi High Court issued a significant ruling in the case of Best Crop Science Pvt. Ltd. Through Authorized Representative vs. Principal Commissioner CGST Commissionerate Meerut & Ors. The court addressed the question of whether authorities under Rule 86A of the CGST Rules could block Input Tax Credit (ITC) beyond what was available in the taxpayer’s Electronic Credit Ledger (ECL) at the time of issuing the order. The decision clarified the scope of powers available to tax authorities regarding ITC blocking under Rule 86A.

The petitioner, Best Crop Science Pvt. Ltd., challenged an order by the CGST Commissioner blocking ITC beyond the amount available in their ECL, which resulted in an artificial negative balance. The petitioner argued that Rule 86A did not permit such action and only allowed blocking of credit available in the ledger at the time of the order.

This case was part of a batch of petitions filed by multiple taxpayers who raised similar concerns. They contended that blocking more ITC than what was available was ultra vires and contrary to the provisions of the CGST Act.

The main legal question was whether Rule 86A of the CGST Rules allowed tax authorities to block an amount of ITC greater than the credit available in the taxpayer's Electronic Credit Ledger (ECL) at the time of the order. The petitioners argued that Rule 86A only permitted blocking available credit, while the Revenue contended that it could block an amount equivalent to ITC fraudulently availed, irrespective of the current ledger balance.

The petitioner relied on precedents like Samay Alloys India Pvt. Ltd. v. State of Gujarat and Laxmi Fine Chem v. Assistant Commissioner, which favored the taxpayer's interpretation, arguing that ITC is a vested right once credited in the ECL.

The Delhi High Court held that Rule 86A did not authorize blocking of ITC beyond what was available in the ECL at the time of issuing the order. The court observed that the language of Rule 86A explicitly refers to “credit of input tax available in the electronic credit ledger,” limiting the scope to credit currently reflected in the taxpayer's account.

The court also noted that ITC is a valuable right under the CGST Act, and any restriction on its use must strictly conform to statutory provisions. The court rejected the Revenue’s argument for a purposive interpretation, instead applying a literal interpretation of the rule, which confines the power to block only the available credit.

The court further emphasized that while Rule 86A serves to protect revenue interests, it is not a provision for tax recovery and should not be used to indefinitely block ITC.

The court ruled in favor of the petitioner, holding that the blocking of ITC cannot exceed the available balance in the Electronic Credit Ledger under Rule 86A. The judgment reinforced the principle that ITC is a vested right and should not be curtailed unless strictly in accordance with the law.

Date of Decision: September 24, 2024

Best Crop Science Pvt. Ltd. Through Authorized Representative vs. Principal Commissioner CGST Commissionerate Meerut & Ors​.