GST: Supreme Court Strikes Down Negative ITC Blocking as Ultra Vires
GST: Supreme Court Strikes Down Negative ITC Blocking as Ultra Vires
The assessee first filed a writ petition before the High Court challenging two significant actions taken by the tax department. The income tax department blocked the assessee’s Electronic Credit Ledger (ECL) under Rule 86A of the Central Goods and Services Tax Rules, 2017, and thereby even rejected the provisional attachment of its bank accounts under Section 83 of the Central Goods and Services Tax Act, 2017. The petitioner approached the High Court to recover the purportedly owed Rs. 1.87 crores. However, after an order dated October 8, 2024, which had caused a negative ECL balance, the petitioner limited its challenge to the problem of blocking the Electronic Credit Ledger (ECL) before the HC.
Main Issue Before HC: Whether it was legal for the taxpayer’s Electronic Credit Ledger to have a negative balance as a result of the ITC being blocked under Rule 86A and whether this kind of negative blocking, which eschewed the due process required by Sections 73 and 74 of the CGST Act, amounted to an illegal act of indirect recovery. The main issue revolved around the legitimacy and boundaries of the authority granted by Rule 86A.
HC’s Decision: The Delhi High Court ruled that Rule 86A is a preventive and temporary measure intended to withhold fraudulently obtained or ineligible ITC and is not a mechanism for tax recovery, citing the precedent set in Best Crop Science (P) Ltd. vs. Commissioner. The court unequivocally declared that negative blocking of the ECL is not permitted by law or contemplated by Rule 86A since it requires the taxpayer to recoup ITC that has already been used, thereby requiring tax without adjudication. Thus, the High Court ordered the blocking order to be immediately removed from the ECL and quashed it to the extent that it imposed a negative balance.
Supreme Court Held: The Delhi High Court’s decision was challenged by the Union of India through the Director General of GST Intelligence in a Special Leave Petition. Following the hearing of the learned Additional Solicitor General, the Hon’ble Supreme Court determined that the petition lacked sufficient merit to warrant interference under Article 136 of the Constitution. As a result, the Court dismissed the SLP, upholding the High Court’s decision that the ECL’s negative blocking was beyond its authority and the scope of Rule 86A.