Input Tax Credit Can't Be Blocked If Credit Balance Is Nil: Bombay High Court

A Division Bench of Justice M S Sonak and Justice Advait M Sethna observed,

“Therefore, on a plain reading of the rule, if on the date of issuing the impugned order or on the date of making an order under Rule 86-A blocking the ITC in the Electronic Credit Ledger, no ITC was found to be available there, then, there would be no question of exercising the powers under Rule 86-A or making any order under Rule 86-A to block such non-available ITC in the Electronic Credit Ledger”

The ruling came in a petition filed by Rawman Metal and Alloys, who challenged an order dated December 9, 2024, issued by the Deputy Commissioner of State Tax, Thane. The order invoked Rule 86-A to block ITC amounting to ₹12,84,273, even though the Petitioner's electronic credit ledger reflected a nil balance at the time the order was passed.

The counsel appearing for the petitioner argued that Rule 86-A could not be applied in the absence of any available ITC, and that such an application was contrary to the plain language of the rule. He relied on rulings from the Gujarat, Delhi, and Telangana High Courts, all of which had held that Rule 86-A could only be invoked if ITC was available at the time of blocking.

In response, the pleader appearing for the revenue, contended that the rule should be interpreted to allow blocking to the extent of ITC fraudulently availed, regardless of whether it had already been utilised. She submitted that any other interpretation would virtually render Rule 86-A otiose, since taxpayers could simply utilise the credit before authorities acted.

The Court disagreed with the State's interpretation and quashed the impugned order. It observed, "The argument that the Rule would be rendered otiose cannot be accepted because the Rule enables the proper officer to block the ITC as may be available in the Electronic Credit Ledger, upon there being reasons to believe that the same had been fraudulently availed or was ineligible. If the intention of the legislature or the rule makers was to enable the blocking of any future credit that might be available in the Electronic Credit Ledger, then the Rule would have been differently worded to expressly enable or permit such a consequence"

It held, “The Rule is accordingly made absolute by quashing and setting aside the impugned order dated 9 December 2024 and directing the restoration of blocked Input Tax Credit equivalent to Rs. 12,84,273/-.”

The Court directed that the restoration be completed within fifteen days of the order being uploaded.

Case Name: Rawman Metal & Alloys v. The Deputy Commissioner of State Tax, Thane

Case No: WRIT PETITION (L) NO. 10928 OF 2025

For Petitioner: Advocate Parmeet Singh, with advocate Vinit Dhage

For Respondent: Additional Government Pleader Amar Mishra