Blocking of ITC under Rule 86A without recording ‘reasons to believe’ and objective evidence is legally unsustainable

The Hon’ble Patna High Court in Graphic Trades Pvt. Ltd. v. State of Bihar and Ors. [C.W.J.C. No. 4506 of 2025, dated April 23, 2025] disposed of the Writ Petition and upheld the blocking of ITC under Rule 86A of the Bihar Goods & Services Tax Rules, 2017(“the BGST Rules”), as the authorities had sufficient material indicating the petitioner received ITC from a non-existent supplier. Further, the Court noted that such blocking is an interim measure and the petitioner may seek reconsideration under paragraph 3.4 of the applicable guidelines contained in CBEC Circular No. 20/16/05/2021 – GST/1552 dated November 02, 2021 (“the Guidelines”).

Facts:

M/s. Graphic Trades Pvt. Ltd. (“the Petitioner”) is engaged in business of providing end to end solutions in the field of Information Technology. A search was conducted at the Principal Place of Business of one M/s. TDML Services Private Limited (“TDML Services”) and it was found non-existent at its principal place of business. Accordingly, the Petitioner, being on the recipient’s list of the TDML Services, was alleged to have availed of unlawful Input Tax Credit (“ITC”) from the TDML Services, a non-existent entity. Hence, vide the order dated February 7, 2025 (“the Impugned Order”), the Additional Commissioner (Investigation) (“the Respondent”), directed to block the ITC lying in the Electronic Credit Ledger of the Petitioner under Rule 86A of the BGST Rules.

The Petitioner contended that the blocking of ITC was done mechanically without independent application of mind by the jurisdictional officer and without recording “reasons to believe” as required under Rule 86A of the BGST Rules. It was also argued that no independent investigation was conducted by the Respondent before passing the Impugned Order.

On the other hand, the Respondent submitted that the Petitioner had received ITC from a non-existent supplier and the blocking was based on investigation report from the authorities. The Respondent further submitted that Rule 86A of the BGST Rules empowers officers to take interim action and the Petitioner had an alternate remedy as per the Guidelines issued under Rule 86A of the BGST Rules.

Hence, aggrieved by the Impugned Order, the Petitioner filed the present Writ Petition.

Issue:

Whether blocking of ITC under Rule 86A without recording ‘reasons to believe’ and objective evidence is legally sustainable?

Held:

The Hon’ble Patna High Court in C.W.J.C. No. 4506 of 2025 held as under:

• Observed that, the TDML Services was found non-existent on the said Principal Place of Business and the said premises was used by another company. The TDML Services availed huge amount of irregular ITC from the suppliers and passed on irregular ITC to their recipients without underlying supply of goods or services or both as revealed from the analysis of their filed Form GSTR-1 and auto populated Form GSTR -2A. In the background of these facts, the Respondent took an interim decision to block the ITC of the Petitioner.
• Observed that, under Rule 86A(1) of the BGST Rules, the Commissioner or an officer authorized by him not below the rank of Assistant Commissioner having reasons to believe that credit of input tax available in the Electronic Credit Ledger has been fraudulently availed or ineligible, can proceed to pass an order blocking the ITC to the said extent.
• Relied on the case of Dee Vee Projects Ltd. vs. Govt. of Maharashtra and Ors. [2022] 99 G.S.T.R. 167 wherein the Hon’ble Bombay High emphasized that the power under Rule 86Aof the Central Goods & Services Tax Rules, 2017 (“the CGST Rules”) is drastic and must be exercised with objective satisfaction based on material, not whims or imagination. The authority must record reasons in writing and exercise the power fairly and reasonably.
• Noted that, in the present case, the Respondent had sufficient materials before him to satisfy himself with regard to the necessity of passing the Impugned Order against the Petitioner under Rule 86A (1) CGST/BGST Rules, which is in the nature of an interim measure.
• Noted that, the Petitioner has a remedy against the blocking of ITC under paragraph 3.4 of the Guidelines and if any such request is made by the Petitioner, the Respondent ought to consider the same as expeditiously as possible and pass a reasoned order after hearing the Petitioner/its authorized representative.

Our Comments:

Rule 86Aof the CGST Rules governs “Conditions of use of amount available in electronic credit ledger”. Further, it empowers the Commissioner or an authorized officer (not below the rank of Assistant Commissioner) to block the debit ITC from a taxpayer’s electronic credit ledger if there is a reason to believe that the credit has been fraudulently availed or is ineligible. Paragraph 3.4 of the Guidelines deals with the remedy available to taxpayers when their ITC is blocked or restricted under Rule 86A of the CGST Rules. Specifically, it provides that if the Electronic Credit Ledger is blocked or debited under Rule 86A of the CGST Rules, the affected taxpayer has the right to seek a remedy by making a representation or appeal against the blocking or debit action.

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