Blocking of ITC through a text message is not proper without specifying the reason

Case Title: Tvl. J.M. Traders v. Deputy Commissioner (ST)

Court: High Court of Madras

Petition Number: W.P. No. 1387 of 2024

Relevant Section: Rule 86A of the Tamil Nadu Goods and Services Tax Rules, 2017

Category of Dispute: Input Tax Credit

Date of Judgement: February 8, 2024

Relevant GST Provisions: Rule 86A of CGST Rules (as adopted under TNGST Rules)

Facts of the Case

1. The petitioner, Tvl. J.M. Traders, challenged the blocking of Input Tax Credit (ITC) amounting to ₹9,90,126, which was imposed via a text message dated 11.12.2023 by the second respondent [Para 1].
2. It was contended that the blocking of credit violated Rule 86A of the TNGST Rules, as it was done without providing reasons in writing, which is a mandatory requirement [Para 2].
3. The petitioner had submitted a reply/explanation even before receiving the formal show cause notice (on 20.12.2023, while SCN was dated 26.12.2023) [Para 3].

Questions in Consideration

1. Whether the blocking of ITC under Rule 86A of the TNGST Rules without providing reasons in writing was legally sustainable?
2. Whether a mere reference to the supplier’s name without any explanation can be treated as compliance with Rule 86A?

[Para 5]

Observation of Court

1. The Court emphasized that Rule 86A requires not just “reasons to believe” but also recording of such reasons in writing and communicating them to the assessee at the time of action [Para 5].
2. The Court held that though Rule 86A does not mandate prior notice, the discretionary power exercised under it requires contemporaneous and written communication of reasons, which was absent in this case [Para 5].
3. The only material shared was the supplier’s name, which was insufficient to satisfy the statutory requirement under Rule 86A [Para 5].

Judgement of the Court

1. The writ petition was allowed, and the respondent was directed to unblock the ITC in the electronic credit ledger of the petitioner [Para 6].
2. However, the Court permitted the Department to initiate fresh proceedings under Rule 86A, provided they comply with procedural requirements including communication of reasons [Para 6].

Between Fine Lines

• The Court protected taxpayer rights against arbitrary blocking of ITC.
• It clarified that procedural compliance is not optional under Rule 86A.
• Communication of reasons in writing is mandatory for invoking Rule 86A.
• Prior notice is not needed, but post-facto justification must be written.
• Revenue can still initiate fresh action if proper process is followed.

Summary of Referred Cases

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