Indefinite Blocking of Input Tax Credit Under Rule 86A of CGST Rules is Unsustainable: Punjab and Haryana High Court - 2025-11-28

The One-Year Ticking Clock: High Court Halts Indefinite ITC Blocking

In a significant decision for businesses navigating the complex landscape of Goods and Services Tax (GST) compliance, the High Court of Punjab and Haryana has clarified that tax authorities cannot invoke indefinite blocking of Input Tax Credit (ITC). The ruling underscores that the restrictive power granted under Rule 86A of the CGST Rules is bound by a strict one-year limitation, beyond which the ledger must be unfettered.

The Backdrop: A Suspended Ledger

The case involved NB International , a brass and copper utensil manufacturer based in Haryana. The firm found itself in a precarious financial position after its Electronic Credit Ledger (ECL) was hit by a blocking order regarding an ITC claim of ₹82,50,038. The tax authorities alleged that the petitioner had claimed input credit based on invoices from M/s M.S. Trading Company , a supplier subsequently identified as non-existent at its registered place of business.

While the petitioner, NB International , argued that it was a bona fide purchaser and had met all evidentiary requirements for the credit, the tax department maintained its stance that the ITC was fraudulently availed. The dispute escalated when the department, despite a partial unblocking following an initial representation, continued to restrict the ITC, effectively extending the block period beyond the statutory one-year mark.

The Legal Tug-of-War

The petitioner relied on the Supreme Court’s recent ruling in Kesari Nandan Mobile v. Office of Assistant Commissioner of State Tax , which interpreted Section 83 of the GST Act. Counsel argued that if the law does not provide for the renewal or extension of a provisional restriction, the executive cannot unilaterally continue to block assets or credit ledgers under the guise of "ongoing investigation."

Conversely, the Revenue argued that Rule 86A is a vital mechanism to protect government interest and that no specific bar exists in the rule against "re-blocking" ITC if the investigation remains pending.

The Court’s Reasoning

The bench, comprising Justice Lisa Gill and Justice Parmod Goyal, rejected the Revenue’s interpretation. By drawing a parallel between Rule 86A and Section 83, the Court observed that both provisions are "pari materia"—meaning they share the same fundamental substance and purpose: the protection of state revenue.

The Court emphasized that the period of one year granted by the legislature is sufficient for tax authorities to conclude their investigations. Failure to do so within this timeframe renders the continued obstruction of the taxpayer's credit ledger legally unsustainable.

Key Observations

The High Court’s ruling included several pointed observations regarding the limits of administrative power:

• On the abuse of process: "Repeated or continuous issuance of a provisional attachment order under the garb of ‘renewal’ could lead to a serious anomaly... akin to filling old wine in a new bottle."
• On legislative intent: "Undoubtedly, the Hon’ble Supreme Court was considering matters involving interpretation of Section 83 of 2017 Act. However, a bare perusal of Section 83 of 2017 Act and Rule 86A of 2017 Rules clearly indicate that basic principle behind both provisions is protection of revenue."
• On the expiry of power: "Sub-Rule 3 of Rule 86A specifically provides that restriction shall cease to have effect after expiry of period of one year from the date of imposition of such restriction."
• On the efficacy of the law: "A period of one year, as ordained by the legislature, is enough for the revenue authorities to conclude its investigation; if not, the legislature could have provided for a renewal or an extended period as in the Excise Act and the Customs Act."

Final Verdict: Implications for Taxpayers

The Court allowed the writ petition, holding that the renewal of the blocking order after its one-year expiration was invalid. While the judgment grants immediate relief to NB International , it also carries a broader message: tax authorities cannot utilize "draconian" recovery-style measures as a catch-all replacement for time-bound investigations.

Moving forward, tax departments must ensure that investigations into purported fraudulent ITC are concluded within the 12-month statutory window. If not, they must rely on other provisions that provide the taxpayer with due process and the right to challenge formal demands, rather than resorting to arbitrary, open-ended freezes on operating credit ledgers.