Unblocking of ITC in accordance with Rule 86A of the CGST Rules

Case Title: Sunny Jain v. Union of India

Court: High Court of Delhi

Petition No.: W.P. (C) No. 6444 of 2022

Coram: Hon’ble Mr. Justice Vibhu Bakhru and Hon’ble Mr. Justice Purushaindra Kumar Kaurav

Date of Judgement: 5 December 2022

Relevant Section: Rule 86A of CGST Rules, Section 16(2)(d) and Rule 37 of CGST Rules

Category of Dispute: Input Tax Credit – Blocking of ITC

Facts of the Case

1. The petitioner, engaged in supply of mobiles under the name Mahavir Impex, was subjected to blocking of ITC worth ₹1.37 crore (IGST + CGST) on 11.02.2020 without any prior notice or hearing opportunity from the authorities.
2. Despite emails and submission of requested documentation including import bills and GSTR comparisons, the petitioner’s credit remained blocked, though briefly unblocked and re-blocked on 01.04.2022 via system-generated emails
3. The reason cited by the authorities was an email from DGARM listing taxpayers who allegedly availed inadmissible ITC during FY 2017–18 and 2018–19, which included the petitioner.
4. A letter was also issued directing deposit of interest for delayed payment to a supplier (D.G. Impex), invoking Section 16(2)(d) and Rule 37 of CGST Rules, which the petitioner contested, stating he had not utilized such ITC and that no show cause notice was issued.

Questions in Consideration

1. Whether ITC can be blocked under Rule 86A merely on the ground of delayed payment to supplier beyond 180 days as per Section 16(2)(d) of CGST Act?
2. Whether blocking ITC for a period exceeding one year violates Rule 86A(3) of CGST Rules?

Observations of the Court

1. Rule 86A permits ITC blocking only in specific fraud/ineligibility scenarios; the term “inasmuch as” limits its scope to the listed conditions only, not to delayed supplier payments
2. Section 16(2) read with Rule 37 allows initial ITC availing even without supplier payment; if unpaid within 180 days, reversal with interest is required, not ITC blocking
3. The department misinterpreted the provision by considering delayed supplier payment as “ineligibility” under Rule 86A
4. As per Rule 86A(3), blocking cannot exceed one year; extending through successive orders is impermissible, although the Court abstained from ruling on this due to lack of specific challenge

Judgement of the Court

1. The blocking of petitioner’s ITC was held to be without legal authority as the conditions under Rule 86A(1) were not fulfilled
2. The Court directed the respondents to immediately unblock the petitioner’s Electronic Credit Ledger (ECL)
3. It clarified that recovery of ITC with interest, if warranted under Section 16(2) proviso, may be carried out following due process

Between Fine Lines

• ITC can be availed before making supplier payments but must be reversed with interest if unpaid within 180 days.
• Blocking ITC is a drastic power that must conform strictly to conditions of Rule 86A.
• Mere ineligibility under Section 16(2)(d) does not justify blocking unless linked to fraud or non-existent transactions.
• Blocking for more than one year is legally questionable.
• Authorities must ensure proper notice and reasoning before ITC blocking.

Summary of Referred Cases