Blocked ITC under Rule 86A — grounds to challenge & recent court trends

Rule 86A of the Central Goods and Services Tax Rules, 2017 provides that in certain circumstances, Commissioner or an officer authorised by him, on the basis of reasonable belief that credit of input tax available in the Electronic credit ledger has been fraudulently availed or is ineligible, may not allow debit of an amount equivalent to such credit in Electronic credit ledger.

The rule allows blocking (restriction on debit) of the electronic credit ledger when an officer forms a subjective satisfaction based on material that suggests fraudulent availment. Because the ledger is a cash-equivalent mechanism for taxpayers, courts repeatedly describe the power as “extraordinary” or “harsh” and insist on strict compliance with the rule’s language and safeguards.

Proper authority for the purpose of Rule 86A:

The Commissioner (including Principal Commissioner) is the Proper officer for the purpose of exercising powers for disallowing the debit of amount from Electronic credit ledger of a Registered person under rule 86A. However, Commissioner/ Principal Commissioner can also authorize any officer subordinate to him, not below the rank of Assistant Commissioner, to be the Proper officer for exercising such power under rule 86A. It is advised that Commissioner/Principal Commissioner may authorize exercise of powers under rule 86a based on the following monetary limits as mentioned below:

Grounds for disallowing debit of an amount from Electronic credit ledger:

Perusal of the rule makes it clear that the Commissioner, or an officer authorised by him, not below the rank of Assistant Commissioner, must have "reasons to believe" that credit of input tax available in the Electronic credit ledger is either ineligible or has been fraudulently availed by the Registered person, before disallowing the debit of amount from Electronic credit ledger of the said Registered person under rule 86a. The reasons for such belief must be based only on one or more of the following grounds:

1. The credit is availed by the Registered person on the invoices or Debit notes issued by a supplier, who is found to be non-existent or is found not to be conducting any business from the place declared in registration.

2. The credit is availed by the Registered person on invoices or Debit notes, without actually receiving any goods or services or both.

3. The credit is availed by the Registered person on invoices or Debit notes, the tax in respect of which has not been paid to the government.

4. The Registered person claiming the credit is found to be non-existent or is found not to be conducting any business from the place declared in registration.

5. The credit is availed by the Registered person without having any invoice or Debit note or any other valid document for it.

Common legal grounds to challenge a Rule 86A blocking order

1. Absence of material to form a reasoned belief / lack of evidence

Blocking of ITC cannot be done on a bare suspicion or borrowed satisfaction, there must be material on record (reports, mismatch of invoices, non-existent supplier records, intelligence reports) that an objective reviewer can examine. Courts have quashed blockings where the officer relied on assertions without tangible material.

2. Violation of mandatory procedural safeguards

Where rule or jurisprudence mandates a pre-decisional hearing (or at least reasoned communication and an opportunity to be heard before debit), blocking without such a hearing is vulnerable. Several High Courts have emphasized that blocking causes serious civil consequences and procedural fairness (natural justice) cannot be bypassed. The Supreme Court too has reinforced that pre-decisional hearing requirements must be respected in many contexts relating to ledger blocking.

3. Excessive or “negative” blocking

Courts have held that the amount debited/blocked should be linked to the ITC that is believed to have been fraudulently availed. Creating a negative balance or blocking amounts grossly disproportionate to the alleged fraudulent ITC is impermissible. Some High Court interim rulings have limited blocking to a percentage of demand or to the quantum reasonably attributable to the suspect invoices.

4. Lack of jurisdiction /improper exercise of power

If the officer who signs the order is not properly authorised under the statute/rules, or the satisfaction has been “borrowed” from another report without independent application of mind, courts have set aside orders. The requirement that the authorised officer themselves record reasons matters.

5. Blocking when supplier exists/bona fide taxpayer

Where the suppliers are genuine, GST returns reconcile or the taxpayer has documents showing receipt of goods/services, courts are cautious to permit blocking — especially when the taxpayer demonstrates bona fides and transactional substance.

Relevant judgments

• Supreme Court dismissed SLPs against Delhi High Court’s judgment which held that GST authorities cannot block input tax credit beyond the amount available in the Electronic Credit Ledger under Rule 86A. The High Court emphasized strict interpretation of the rule, protecting taxpayers from arbitrary blocking and holding that ITC is a valuable right. The Supreme Court upheld this by declining interference, thus reinforcing taxpayer safeguards. [2025] 84 TAXLOK.COM 043 (SC)

• Petitioner challenged orders issued by the Commissioner under Rule 86A of the CGST Rules, blocking their Input Tax Credit (ITC) in excess of the available balance. The court examined whether Rule 86A allows blocking ITC beyond the available balance, which creates a negative ledger balance, hampering the taxpayer’s ability to utilize ITC. [2024] 76 TAXLOK.COM 107 (Delhi)

• The petitioners challenged the blocking of their electronic credit ledger under Rule 86A of the CGST Rules without prior notice or justification. The court found that the blocking violated the principles of natural justice, as no opportunity to be heard was provided and no detailed reasons were given for the action. The court quashed the impugned action, allowing the tax authorities to proceed according to law. [2024] 73 TAXLOK.COM 253 (Telangana)

• Petitioner approached this Court by way of this petition and has sought various reliefs, the primary relief being to quash and set aside the action of respondents of blocking available ITC. The restriction was imposed on 23rd November 2022 and one year period expired on or about 23rd November 2023. Therefore, by operation of law itself, the restriction imposed has lapsed. [2024] 74 TAXLOK.COM 086 (Bombay)

• The Delhi High Court directed lifting of Input Tax Credit (ITC) blocking under Rule 86a as more than one year had passed since imposition. While allowing the petition to that extent, the Court clarified that the lifting of restriction would not impact the adjudicating authority’s power to proceed under applicable legal provisions. [2025] 83 TAXLOK.COM 281 (Delhi)