Rule 86A cannot block Electronic Credit Ledger debits beyond the input tax credit actually available at the time of the order, and creating a negative balance is illegal.

Facts of the Cases-Three separate writ petitions were taken up together (by consent) because the legal question was identical:

Petitioners:

1. M/s Shyam Sunder Strips — negative ECL entry shown as Rs 34,43,946 (entry dated 05/12/2024).

2. M/s Shivam Trading Co. — negative ECL entry shown as Rs 67,82,734 (entry dated 01/09/2025).

3. Kamaldeep Metalics Pvt. Ltd. — negative ECL entry shown as Rs 16,49,020 (entry dated 12/06/2025).

Impugned action: Each petitioner’s ECL was blocked under Rule 86-A on the premise that ITC available had been fraudulently availed or that suppliers were non-existent. This blocking led to negative balances recorded in their ECLs, preventing them from using ITC to discharge liabilities.

Petitioners’ stance: Blocking orders disallowed debit in excess of the credit actually in ECL and thereby created artificial negative balances. They contended that Rule 86-A permits blocking only of the amount actually available in the ECL at the relevant time.

Respondent (Revenue) stance: Rule 86-A is a protective/emergency provision to prevent misuse of ITC and is not limited to the ledger balance at the time. The revenue argued the statute does not preclude blocking even if the available balance is nil or insufficient — blocking beyond the balance is permissible to protect revenue and to prevent wrongdoers from escaping liability.

Issue Invovled-

Can the tax officer block (freeze) more ITC than what is actually sitting in the taxpayer’s ECL at the time the blocking order is passed?

Can they create a negative balance using Rule 86-A?

What the taxpayers said

• Rule 86-A only lets the officer block the ITC that is actually available in your ECL right now.

• So blocking more than that (creating a negative balance) is illegal.

• Blocking is a temporary protective step — it’s not the same as formally taking money from the taxpayer. For permanent recovery, the department must follow other laws (different sections that give proper recovery powers).

What the tax department said

• Rule 86-A is meant to protect revenue quickly when there’s suspicion of fake or ineligible ITC (for example, fake suppliers).

• If the department suspects fraud, it should be able to block the credit to stop misuse, even if that creates a negative entry.

• The department can always use other steps later if necessary, and the Rule is temporary (maximum one year and subject to review).

Court’s analysis and reasoning

1. Statutory context: The Court reviewed Sections 16, 41 and 49 and understood ITC as a statutory right that is subject to conditions. The ECL is the mechanical ledger where claimed ITC is stored and from which liabilities are discharged.

2. Textual construction of Rule 86-A: The Court agreed with the interpretation in Samay Alloys and Best Crop Science that the phrase “credit of input tax available in the electronic credit ledger” contemplates credit actually lying to the credit of the taxpayer in the ECL at the relevant time. Therefore, Rule 86-A presupposes availability of credit in the ledger before it can be blocked.

3. Nature of the consequence: While Rule 86-A allows restriction of debit from the ledger (a temporary measure), it does not authorize making debit entries that create a permanent recovery or a negative ledger balance beyond what was available.

4. Precedent weight: The Court followed Gujarat and Delhi High Court precedents (and noted that certain Delhi HC judgments were upheld by the Supreme Court in related SLPs), aligning with the strict, textual approach.

5. Counterarguments rejected: The Court was not persuaded by contention that a literal reading would frustrate revenue protection. It held that when the legislature needed a broader power it provided other mechanisms (Sections 73/74, cancellation under Section 29, provisional attachment under Section 83, etc.) and those remedies remain available to the revenue.

Court Order-

• The High Court allowed all three writ petitions agreed with the taxpayers: Rule 86-A can only be used to block the credit that is actually present in the ECL at the time of the order.

• The Court left open the revenue’s right to pursue recovery by statutory routes (sections 73/74, cancellation, provisional attachment, etc.), i.e., remedies for recovery remain available and were not curtailed by this judgment.

• The tax officers cannot use Rule 86-A to create an artificial negative balance by blocking more than the existing ECL balance.

• So the court set aside the parts of the blocking orders that went beyond the available balance.

• The court also said: the tax department is not stopped from using regular legal routes (like assessment or recovery actions) to get back wrongly claimed credit — just they cannot use Rule 86-A to over-block.

GST Case Law Shyam Sunder Strips, Shivam Trading Co., Kamaldeep Metalics Pvt. Ltd. Versus Union of India

Citation-2025 TAXONATION 2805 (PUNJAB AND HARYANA)(Click here to read full case law)

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