Punjab & Haryana High Court Quashes Negative Blocking of ITC Under Rule 86A; Holds Ledger Cannot Be Blocked Beyond Available Credit

The Punjab & Haryana High Court has quashed orders that disallowed debit from Electronic Credit Ledgers of taxpayers in excess of the Input Tax Credit (ITC) available at the time of passing of the said order.

The Division Bench comprising, Justice Lisa Gill and Justice Meenakshi I. Mehta followed the principles judicial reasoning for blocking of Electronic Credit Ledger under Rule 86-A as enumerated by Gujarat High Court in case of Samay Alloys and thereafter by Delhi High Court in case of Best Corp Science, Kings Security Guard Services, Karuna Rajendra Ringshia as well as Telangana High Court in Laxmi Fine Chem. The High Courts of Gujarat and Delhi applied literal rule of interpretation and held that the phrase 'available in the electronic credit ledger' cannot mean that officer can block an amount exceeding the available ITC in the Electronic Credit Ledger.

In exercise of Rule 86A, despite having NIL balance in taxpayer's electronic credit ledger, credit was blocked by the officer in exercise of powers under Rules 86A of the CGST Rules. Hence, three writ petitions pertaining to the action of blocking of Electronic Credit Ledgers of the taxpayers. The taxpayers challenged creation of negative ITC balance worth Rs. 34,43,946, Rs. 67,82,734 and Rs. 16,49020 in their Electronic Credit Ledgers.

On validity of negative blocking of Electronic Credit Ledger, the High Court tracing through the ITC mechanism under GST, clarified that “right to avail and utilize ITC is clearly a statutory right subject to conditions as set out in the applicable statutory provisions”. In this context, the High Court referred to the Delhi High Court judgment in Best Corp Science which distinguished the ratio laid down by Calcutta High Court in case of Basant Kumar Shaw supporting negative blocking of ITC available in the Electronic Credit Ledger.

From a perusal of the extract in the Best Corp Science judgment relating to interpretation of the phrase 'credit of the input tax available in the electronic credit ledger' in the opening line of Rule 86-A, High Court inferred that “….there is no ambiguity in the plain language of Rule 86-A of Rules, 2017 and neither does literal construction of this Rule lead to any absurdity. It was further held that not allowing debit of ITC is a temporary measure which is to be imposed only if condition set out in Rule 86-A of the Rules, 2017 are satisfied, thus enabling the Commissioner to withhold the available ITC in the ECL, when there is reason to believe that it has been fraudulently availed or is ineligible, does not require a prior show cause notice to the tax payer. It was held that by its very nature this emergent provision to block usage of ITC credit in ECL would be rendered negatory in case of requirement of a show cause notice. It was reiterated that Rule 86A of Rules, 2017 is not a provision or machinery for recovery of tax or dues under the Act, 2017.Whether there has been incorrect availment or utilization of TC would be determined by competent authority under Sections 73 and 74 of CGST Act, 2017.”

The High Court further rejected the Revenue's argument that the Supreme Court's dismissal of the SLP in the Kings Security Guard case was passed in limine. It noted that the Delhi High Court's decision in Kings Security stood affirmed by the Supreme Court, which dismissed the Revenue's SLP with the observation that “no case for interference is made out in exercise of jurisdiction under Article 136 of the Constitution of India.”

Thus, the High Court allowed all three writ petitions.

Case Name: Shyam Sunder Strips & Ors. vs. UOI & Ors.

Case No. : CWP 23675 of 2025

Date of Decision: 04.11.2025

Appearance: Advocates Deepak Gupta, Ramneek K. Sandhu, Hrithik Chaudhary appeared on behalf of the assessee, whereas Revenue was represented by Advocates Nitish Bansal, Ajay Kalra, Isha Januja.