ITC column was blocked even in the case where there was no credit balance in the Electronic Credit Ledger.

Case Title: R.M. Dairy Products LLP v. State of Uttar Pradesh

Court: High Court of Allahabad

Petition Number: Writ Tax No. 434 of 2021

Date of Judgement: July 15, 2021

Category of Dispute: Input Tax Credit (Blocking under Rule 86A)

Relevant Sections: Rule 86A(1)(a)(i), Section 49, Section 74, Section 78, Section 79 of the CGST/UPGST Act, 2017

Takeaway: “Blocking of ITC is not Recovery – Rule 86A exists only to secure revenue interest, not effect recovery.”

Facts of the Case

• The petitioner, R.M. Dairy Products LLP, challenged the order dated 25-06-2021 issued under Rule 86A(1)(a)(i) of the GST Rules which blocked ₹7,06,66,700/- of ITC from their electronic credit ledger. [Para 2]
• The ITC in question was availed based on purchases from M/s Darsh Dairy & Food Products, Agra, who was later found to be non-existent by the authorities. [Para 4, 15]
• The adjudication under Section 74 of the Act was still pending at the time of blocking, and no final determination of tax liability had been made. [Para 4]

Questions in Consideration

1. Whether blocking of ITC under Rule 86A without final adjudication under Section 74 is legally sustainable? [Para 4]
2. Whether the officer had valid “reason to believe” for invoking Rule 86A? [Para 3, 16]
3. Does Rule 86A equate to recovery of tax or merely secures revenue interests? [Para 4, 18–23]
4. Can lien under Rule 86A apply even when no ITC is currently available in the ledger? [Para 24]

Observations of the Court

• The Court clarified that Rule 86A is not a recovery provision and does not authorize appropriation or reversal of credit, but only blocks usage subject to conditions. [Para 11, 18–21]
• The phrase “input tax available” in Rule 86A(1) refers to credit fraudulently or ineligibly availed in the past, not necessarily the amount available on the date of blocking. [Para 12–14]
• The officer’s “reason to believe” was based on evidence that the supplier was non-existent, which satisfies the threshold for action under Rule 86A. [Para 15–17]
• Even in absence of balance on the blocking date, a lien is deemed created, and future credits can be restricted up to the blocked amount. [Para 24–25]
• The invocation of Rule 86A was thus held to be a valid exercise of power, not contingent on completion of adjudication under Section 74. [Para 17, 23]

Judgement of the Court

• The writ petition was dismissed, affirming the revenue’s authority to block ITC under Rule 86A in the presence of credible material and reasons to believe fraud/ineligibility. [Para 26]
• The court upheld that the revenue can impose a lien on future credits without adjusting or appropriating any amount until adjudication is finalized as per law. [Para 22, 25

Between Fine Lines

• Rule 86A permits blocking of ITC without requiring adjudication under Section 74 to be completed.
• It is a preventive tool, not a recovery mechanism.
• Lien can extend to future credits up to the blocked amount.
• “Reason to believe” need not be proven, only substantiated with material.
• Revenue cannot adjust or appropriate blocked credit without following proper recovery provisions.

Summary of Referred Cases

Download Judgement