Court Rules Against Tax Authorities Blocking Electronic Credit Ledger with Nil Balance Under Rule 86A of CGST Rules

Case name:

SAMAY ALLOYS INDIA PVT. LTD. vs. STATE OF GUJARAT

HIGH COURT OF GAUHATI

R/Special Civil Application No. 18059 of 2021

Key Takeaways:

• The condition precedent for invoking Rule 86A is the availability of credit balance in the electronic ledger which is alleged to be ineligible.
• If credit balance is available, the authority can disallow debit of an amount equivalent to such credit after recording reasons in writing.
• However, there is no power to insert a negative balance for credit to be availed in the future.
• Inserting a negative balance with nil credit amounts to recovery without adjudication, which is impermissible.

Issue:

Can the tax authorities block the electronic credit ledger of a taxpayer and insert a negative balance under Rule 86A of the CGST Rules, 2017 when there is no credit balance available in the ledger?

Facts:

The petitioner company (writ applicant No.1) is engaged in manufacturing and selling MS Billets. It is registered under the GST Act.

When the petitioners attempted to file their GST return for September 2021, their electronic credit ledger showed a nil balance.

However, the GST portal displayed a message that the respondent tax authority (respondent No.2) had blocked the electronic credit ledger and inserted a negative balance.

If the petitioners filed the return claiming input tax credit (ITC) with this negative ledger balance, they would have to pay additional output tax equivalent to the negative amount.

The petitioners requested reasons from the respondents for blocking the ITC, but received no response.

Arguments:

Petitioners’ Arguments:

Blocking the electronic credit ledger with a nil balance is beyond the scope of Rule 86A and without jurisdiction.

Rule 86A can only be invoked if there is an available credit balance in the ledger which is alleged to be ineligible.

Inserting a negative balance amounts to recovery without adjudication, which is impermissible.

The respondents have other remedies like issuing show cause notices and adjudicating ITC admissibility instead of invoking Rule 86A.

Respondents’ Arguments:

Blocking the ledger under Rule 86A is in accordance with law.

The phrase “equivalent to such credit” in Rule 86A does not require an available credit balance. Not using the word “available” is conscious and significant.

Allowing debit from the future credits availed is against the intent of Rule 86A to prevent passing of ineligible ITC.

Key Legal Precedents:

• Rohtas Industries Limited v. Superintendent of Central Excise (2000) 123 ELT 124 (Patna HC)
• Commissioner of Income Tax, Madras v. Kasturi & Sons Ltd. (1999) 3 SCC 346
• Kapil Mohan v. Commissioner of Income Tax, Delhi (1999) 1 SCC 450
• S.S. Industries v. Union of India (2021) 87 GSTR 71 (Guj)

The court relied on these precedents to hold that taxing provisions must be strictly construed, no equity can be applied, and authorities cannot make debit entries in taxpayers’ ledger accounts without express statutory provision.

Judgment:

The court allowed the writ petition and ruled:

The condition precedent for invoking Rule 86A is the availability of credit balance in the electronic ledger which is alleged to be ineligible.

If credit balance is available, the authority can disallow debit of an amount equivalent to such credit after recording reasons in writing.

However, there is no power to insert a negative balance for credit to be availed in the future.

Inserting a negative balance with nil credit amounts to recovery without adjudication, which is impermissible.

The respondents were directed to withdraw the negative block on the petitioners’ ledger.

The petitioners were entitled to a refund of the Rs. 20 lakh deposited by them under protest to enable filing of returns.

The court held that the tax authorities exceeded their jurisdiction under Rule 86A by blocking the ledger with a nil credit balance. It emphasized strict interpretation of taxing provisions.