Input Tax Credit Blocking Cannot Continue Beyond One Year From Imposition: Bombay High Court

The Bombay High Court has recently reiterated that a restriction on utilization of Input Tax Credit in the Electronic Credit Ledger cannot continue beyond one year from the date of its imposition.

A division bench of Justices G.S. Kulkarni and Aarti Sathe, examining Rule 86A(3) of the Central Goods and Services Tax Rules, 2017, observed,

"Having heard learned Counsel for the parties and having perused the record, we are of the considered view that there appears to be much substance in the submissions made on behalf of the Petitioner, that the blocking of ITC in the ECL of the Petitioner beyond the period of one year is against the mandate of Rule 86A(3) of the CGST Rules. This is further clear from the very language of the aforesaid Rule, which provides that the restriction as envisaged, of blocking of the ITC will cease to have effect after expiry of the period of one year from the date of imposing such restriction. Rule 86A (3) thus provides for an automatic unblocking of credit post the expiry of one year."

The bench was hearing a writ petition filed by Elitecon International Ltd., whose input tax credit was blocked on March 7, 2025 and whose bank accounts were provisionally attached on February 27, 2025.

The petitioner contended that in terms of Rule 86A(3), the restriction could not continue beyond March 7, 2026. It also argued that no reasons were communicated for blocking the ITC and no pre-decisional hearing was granted.

The respondents contended that the blocking was justified as there were reasons to believe that ITC had been fraudulently availed and that the action was taken in accordance with law.

The court noted that Rule 86A(3) specifically provides that the restriction on utilisation of ITC shall cease to have effect after expiry of one year from the date of imposing such restriction. It held that the language of the provision is clear and that the restriction cannot continue beyond the prescribed period, resulting in automatic unblocking by operation of law.

Referring to its earlier decision in NZS Traders Pvt. Ltd., the court reiterated that once the period of one year expires, the restriction stands lapsed and the credit ought to be unblocked.

The court further held that blocking of ITC entails civil consequences and requires adherence to principles of natural justice, including the grant of a pre-decisional hearing.

It observed, “prior to blocking of the ITC in the ECL of the Petitioner, a hearing needs to be given to the Petitioner, and the absence of a pre-decisional hearing would be in violation of the principles of natural justice. This, in view of the fact that blocking of the ITC in the ECL of the Petitioner entails civil consequences, and would have a crippling effect on the business of the Petitioner, which would require that a hearing be granted prior to the blocking of the ITC in the ECL.”

Applying these principles, the court held that continuation of the blocking of ITC beyond one year was contrary to Rule 86A(3) and therefore arbitrary and illegal.

Accordingly, the High Court quashed the provisional attachment orders dated February 27, 2025 and directed that the blocking of the petitioner's Electronic Credit Ledger be lifted.

It also ordered the defreezing of the petitioner's bank accounts, while keeping open the liberty of the authorities to take appropriate action in accordance with the law.

For Petitioner: Advocate Dr. Sujay Kantawala with Advocates Anupam Dighe, Chandni Tanna, Renita Alex, instructed by India Law Alliance.

For Respondents: Additional Government Pleader S. D. Vyas with Additional Government Pleader A. R. Deolekar for Respondent Nos. 2 and 3; Advocate Jitendra Mishra with Advocates Sangeeta Yadav and Rupesh Dubey for Respondent Nos. 1, 4 and 5.