Revenue Department cannot Block a company's electronic credit ledger (ECL) by creating a negative balance.

The Telangana High Court issued an important decision regarding blocking a company's tax credit account ledger.The case involved Laxmi Fine Chem [2024 TAXONATION 956 (TELANGANA)] challenging the tax department's method. The department blocked the company's credit account by creating a negative balance, suspecting them of claiming tax credits incorrectly.The Court ruled against the department's approach. They said the department should follow proper procedures for such cases as outlined in the Central Goods and Services Tax Act (CGST Act) instead of using a rule (Rule 86(A) of CGST Rules) not designed for this purpose.

Issue: The petitioner argues that the tax authorities illegally blocked their input tax credit (ITC) of Rs. 50,06,000/- for the period February 1st to 13th, 2024.

Grounds for Challenge:

1. Lack of Notice: The blocking order was issued without a show cause notice, violating principles of natural justice.

2. Improper Blocking Method: The authorities created a negative credit in the petitioner's electronic credit ledger, exceeding their power under Rule 86(A) of the CGST Rules 2017. This rule only allows blocking credit already available in the ledger, not creating future restrictions.

Court's Reasoning:

• The court agreed with both arguments raised by the petitioner.
• Citing a previous case (Samay Alloys India Pvt.Ltd. vs. State of Gujarat), the court clarified that Rule 86(A) doesn't permit creating a negative credit balance.
• The court emphasized that blocking can only occur for existing credit and cannot restrict future credit utilization.
• Blocking ITC without a notice violates natural justice principles.

Court's Decision:

• The court allowed the writ petition, quashing the impugned order.
• The tax authorities were directed to Withdraw the negative credit block and Immediately recall the order of blockage.

Rule 86A. Conditions of use of amount available in electronic credit ledger.

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as

a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-

i.issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained;

or

ii. without receipt of goods or services or both; or

b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or

c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or

d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36,

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.

(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.

(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.]

Topic- Laxmi Fine Chem Versus Assistant Commissioner

Citation-2024 TAXONATION 956 (TELANGANA)

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