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Rules Blocked ITC Under Rule 86A Cannot Be Used as
In a significant ruling for GST litigation, the has clarified that blocked under , cannot be treated as payment of the mandatory required for filing an appeal under . The Division Bench of Justice Anil Khetarpal and Justice Shail Jain dismissed a petition by seeking to utilise ₹3.33 lakh from its blocked for the , holding that a restriction under Rule 86A merely prevents debit of the amount—it does not amount to payment or against an .
"The mere blocking of input tax credit does not amount to its payment or
towards an
,"
the Court observed.
"A restriction under Rule 86A only prevents debit of the specified amount from the ECL. Unless the amount is actually debited or appropriated towards the liability, the requirement of
cannot be treated as satisfied merely because the credit has been placed beyond the use of the registered person."
The Dispute Over Blocked ITC
The case arose from an investigation by the , , into a network of entities connected with . was alleged to be a non-genuine entity issuing invoices without corresponding supply of goods or services, and Spherion Solutions was identified as one of its recipients. A dated , alleged of ₹33.32 lakh without receipt of corresponding goods or services.
The confirmed an Integrated Goods and Services Tax (IGST) demand of ₹33.32 lakh along with an equivalent penalty. However, the uploaded in erroneously aggregated the tax demand and penalty as ₹66.65 lakh under the head "penalty," causing the GST portal to compute the at ₹6.66 lakh instead of the correct ₹3.33 lakh (10% of the disputed tax demand). The authority later rectified the error under .
The surviving dispute centred on Spherion Solutions' request to use part of its blocked ITC for the . The company's ECL showed that the DGGI had blocked ₹33.32 lakh on (automatically removed on ), and separately, the blocked ₹64,386 on , and ₹17.31 lakh on —totalling subsisting restrictions of ₹17.96 lakh. The company argued that since the blocked credit exceeded the required of ₹3.33 lakh, requiring additional cash payment would impose a double burden.
Legal Framework: vs. Blocked Credit
mandates that no appeal shall be entertained unless the appellant has paid 10% of the disputed tax in addition to the amount admitted as payable. Section 49(4) permits utilisation of credit available in the ECL subject to conditions and restrictions under the GST law. Rule 86A empowers the competent officer, after recording reasons to believe that ITC has been fraudulently availed or is otherwise ineligible, to restrict debit of such credit.
The Revenue opposed the plea, arguing that blocking under Rule 86A is a and does not constitute recovery or . It distinguished the decisions in and , noting that those cases concerned credit ordinarily available for utilisation, not credit specifically blocked.
The Court agreed, holding that where a Rule 86A restriction is operating, the corresponding amount cannot be debited from the ECL unless the restriction is removed or modified by the . The Bench found that the had not appropriated the credit in its order against Spherion Solutions (unlike the separate directed against Crimson International), and the blocked credit had not been treated as payment towards the tax demand.
Court's Reasoning: Two Independent Grounds
The Court identified two independent reasons for rejecting the adjustment. First, the subsisting restrictions were imposed by a jurisdictional , who was not made a party to the . The existing respondents did not control those restrictions, and the orders imposing them were not placed on record. The Court could not examine the material considered or the reasons recorded by that officer, and the descriptions in the Blocked Credit Ledger could not substitute for such reasons.
Second, the ledger did not disclose the running balance of the ECL—only the amounts blocked or unblocked on different dates. It did not establish that the entire ₹17.96 lakh, or any specified part, would be available for debit if restrictions were lifted.
"The satisfaction contemplated under Rule 86A must be that of the officer imposing the restriction,"
the Court emphasised.
"Such reasons must emerge from that officer’s record and cannot subsequently be supplied by an authority that neither imposed nor controls the restriction."
Protection of
Despite rejecting the request to treat blocked credit as , the Court protected the petitioner's . It noted that Spherion Solutions had attempted to file its appeal on , and that the original DRC-07 error was attributable to the , corrected only on .
"The Petitioner cannot be deprived of its
on account of the time consumed in obtaining rectification of the erroneous
and in prosecuting the present
,"
the Court observed.
The petitioner was permitted to file an appeal under Section 107 within four weeks from the judgment date, and such appeal cannot be rejected on if filed within that period. The Court clarified that the need not be made exclusively through the —any credit lawfully available and capable of being debited from the ECL can be used. However, credit cannot be treated as payment unless the restriction is removed.
The and were directed to assist with electronic filing. If the portal continues to prevent filing despite correct completion of and compliance with Section 107(6), the petitioner must be permitted to submit the appeal manually. The Court also restrained for four weeks.
Implications for Taxpayers
This ruling clarifies a critical procedural point in GST appeals: blocked ITC under Rule 86A cannot be used to satisfy the condition unless the taxpayer first gets the restriction lifted. Taxpayers with significant blocked credits must therefore arrange separate cash payments or seek unblocking of credits through appropriate proceedings before the .
The decision also underscores the importance of challenging Rule 86A restrictions in properly constituted proceedings before the officer who imposed them, rather than seeking relief in the appellate context. Legal practitioners should advise clients to monitor their ECL and act promptly to challenge or remove restrictions if they intend to use those credits for appeal pre-deposits.
The judgment leaves open the wider question of whether ordinarily available ITC can be used for pre-deposits—a proposition not disputed by the Revenue in this case. Future litigation may further clarify the scope of Section 49(4) and Rule 86A interplay.
Conclusion
The 's decision provides much-needed clarity on the interaction between blocked ITC and requirements under GST law. While protecting the taxpayer's right of appeal, it reinforces the distinction between preventive restrictions and actual payment of adjudicated demands. Taxpayers and their counsel must now carefully navigate the dual hurdles of Rule 86A restrictions and obligations, ensuring that cash liquidity or unblocked credit is available before approaching the appellate forum.
