Bombay HC: ITC Blocked Over 1 Year Must Be Unblocked

Bombay High Court Rules on ITC Blocking Limits

The Bombay High Court has delivered a significant ruling concerning the blocking of Input Tax Credit (ITC) under Rule 86A of the CGST Rules, 2017. The court has clarified that any restriction placed on an electronic credit ledger cannot extend beyond one year from the date it was imposed. This means that such restrictions automatically expire by operation of law once the one-year period concludes.

Key Case Details and Petitioner’s Grievance

In the case of NZS Traders Pvt. Ltd. v. Union of India & Ors., the petitioner’s Input Tax Credit, amounting to over ₹4.25 crore, was blocked. This action was taken on February 16, 2024, without prior notice or an opportunity for the petitioner to be heard. The core of the petitioner’s argument was that the restriction continued even after the statutory one-year period had elapsed, which they contended was a violation of Rule 86A(3) of the CGST Rules, 2017. The petitioner had approached the court seeking the unblocking of their ITC and the quashing of the impugned attachment.

The Court’s Interpretation of Rule 86A

The Bombay High Court, in its judgment on Writ Petition No. 4815 OF 2024, strictly interpreted Rule 86A(3) of the CGST Rules, 2017. The court emphasized that the one-year time limit for such restrictions is absolute. It stated that the restriction automatically lapses upon the expiry of this period, irrespective of other circumstances.

The court’s reasoning aligns with previous judicial pronouncements, such as the case of Seya Industries Ltd. vs. State of Maharashtra. In both instances, the courts have underscored that Rule 86A serves as a temporary protective measure rather than a punitive tool. Consequently, strict adherence to the stipulated timeline is mandatory.

Understanding Rule 86A of CGST Rules, 2017

Rule 86A outlines the conditions under which the amount available in an electronic credit ledger can be restricted. Key provisions include:

• An officer, not below the rank of Assistant Commissioner, can restrict the debit of ITC from the electronic credit ledger if they have reasons to believe that the credit was fraudulently availed or is ineligible.
• Reasons for such belief include:
  • ITC availed on invoices issued by a registered person found to be non-existent or not conducting business from the registered address.
  • ITC availed without the actual receipt of goods or services.
  • ITC availed on invoices where the tax charged has not been paid to the government.
  • The registered person availing the credit is found to be non-existent or not conducting business from their registered address.
  • The registered person is not in possession of the required tax invoice or debit note.
• The Commissioner or an authorized officer can allow the debit of the restricted amount if they are satisfied that the conditions for disallowing the debit no longer exist.
• Crucially, any such restriction ceases to have effect after one year from the date it was imposed.

The court rejected the Department’s arguments that the cancellation of GST registration or pending proceedings could justify the continued blocking of ITC beyond the statutory period. The High Court directed that the impugned attachment be set aside, while leaving other related issues open for further adjudication.

Readers should treat this as a tax and compliance update, not as personal advice.

This article is for general information based on available source information. It should not be considered legal, tax, investment, or financial advice.