The Bombay High Court has strongly asserted that under Rule 86A(3) of the CGST Rules, restriction on utilisation of input tax credit (ITC) in the Electronic Credit Ledger (ECL) cannot continue beyond one year from the date on which such restriction is imposed, and upon expiry of that period the blockage ceases automatically by operation of law. The Court also laid down that blocking of ITC in the ECL entails serious civil consequences and, therefore, in the absence of extraordinary reasons or exceptional circumstances, a pre-decisional hearing is required; and failure to grant such hearing renders the action vulnerable on the ground of violation of principles of natural justice.
The Division Bench comprising Justice G. S. Kulkarni and Justice Aarti Sathe observed that there was much substance in the petitioner’s contention that blocking of ITC in the ECL beyond one year is contrary to Rule 86A(3) of the CGST Rules, because the language of Rule 86A(3) itself provides that such restriction shall cease to have effect after expiry of one year from the date of imposing the restriction, thereby contemplating automatic unblocking by operation of law.
Reference was made to the decisions in the case of NZS Traders Pvt Ltd. v. Union of India [Writ Petition No.4815 of 2024] and Seya Industries Ltd. v. State of Maharashtra [(2024) 20 Centax 466 (Bom)], to reiterate that once the statutory period of one year expires, continuation of blockage of ITC is impermissible and the taxpayer is not required to seek any separate declaration for such relief, since the benefit flows directly from the statutory provision.
The Bench observed that prior to blocking ITC in the ECL, a hearing is required to be granted to the taxpayer, because such blocking entails civil consequences and may have a crippling effect on the business of the taxpayer. The absence of a pre-decisional hearing was held to be in violation of the principles of natural justice.
The Bench therefore, held that in the facts of the present case, blocking of the alleged ITC in the petitioner’s ECL beyond one year was against the mandate of Rule 86A, and the impugned action was arbitrary and illegal. Consequently, it quashed and set aside the provisional attachment order dated February 27, 2025, directed that the ECL blockage dated March 7, 2025 stood unblocked, and ordered defreezing of the petitioner’s bank accounts, while keeping open the liberty of both sides to adopt appropriate proceedings in accordance with law on other issues including ITC.
Briefly, a search was conducted at the petitioner’s premises on February 12, 2025; summons were issued on February 13, 2025 to the petitioner’s director in relation to purchases and ITC availed from M/s. Business Bay Agencies; on February 27, 2025, the department informed the petitioner that ITC of Rs. 54.09 crores had accrued from suppliers whose registrations stood cancelled and sought payment of Rs. 52.46 crores, while also initiating attachment of the petitioner’s bank accounts by issuing Form GST DRC-22 to the banks.
On March 11 and 12, 2025, ITC amounting to Rs. 13.75 crores were blocked in the petitioner’s ECL; the petitioner sought reasons for such blocking; and by letters dated March 13, 2025 and March 31, 2025, the department stated that the blocking was done on the basis of an internal letter dated February 27, 2025 received from respondent no. 2.
The petitioner’s case was that its bank accounts were provisionally attached on the allegation that it had availed ineligible input tax credit from suppliers whose GST registration had been cancelled, and that its ECL was blocked without assigning reasons as mandated under Rule 86A of the Central Goods and Services Tax Rules, 2017 and without granting any hearing, thereby violating principles of natural justice.
Appearances:
Advocates Dr. Sujay Kantawala, Anupam Dighe, Chandni Tanna, and Renita Alex, for the Petitioner/ Taxpayer
Advocates S. D. Vyas, A. R. Deolekar, Jitendra Mishra, Sangeeta Yadav, and Rupesh Dubey, for the Respondents/ Revenue
