ITC Blockage Cannot Continue Beyond One Year Under CGST Rules: Madras High Court

The Madras High Court on 21 August held that a restriction on the use of Input Tax Credit (ITC) under Rule 86A of the Goods and Services Tax (GST) Rules cannot continue beyond one year.

Justice S. Raveekumar directed the authorities to unblock the ITC of Metal Trade Incorporation, which had remained blocked for more than two-and-a-half years. He held:

“the restriction was imposed on 27.01.2023 and more than 2 ½ years have passed. In view of the same, the restrictions on the blockage ceased to have effect upon expiry of one year and therefore, cannot be continued. Just because the third respondent had passed the impugned communication on 13.09.2023, the blocking of ITC under Section 86A cannot continue beyond one year.”

The dispute arose after the State Tax authorities issued summons to Metal Trade Incorporation on 18 October 2022 under Section 70(1) of the GST Act. During the subsequent proceedings, the authorities issued an intimation proposing a penalty for the period from 2017-18 to 2022-23.

According to the Department, its preliminary investigation indicated that Metal Trade Incorporation was a non-existent dealer and bill trader. The Joint Commissioner (ST), Intelligence, accordingly issued communications directing that the ITC of beneficiaries of the alleged bill trader be blocked under Rule 86A.

Metal Trade Incorporation challenged the continued blockage of its ITC before the High Court. Although it had initially raised several grounds, it ultimately confined its challenge to the continuation of the restriction beyond one year.

The Court noted that the petitioner's ITC had been blocked on 27 January 2023 and that the restriction continued even after the writ petition was filed. It observed that Rule 86A(3) expressly provides that a restriction imposed under Rule 86A(1) ceases to have effect after one year. It observed:

“The language employed under Rule 86A(3) clearly explicates that the restriction is valid only for a period of one year and that it shall cease to have any effect upon the expiry of such period..”

The Bench also held that more than two-and-a-half years had passed since the ITC was blocked. Therefore, the restriction had ceased to have effect and could not continue merely because the Department had subsequently issued a communication. It noted:

“...The appropriate authority also does not raise the attachment or cancel the blockage even after one year and as a result, numerous writ petitions have been filed challenging the continuation of such restriction even after the expiry of one year...”

Further, the Court held that Rule 86A requires the assessment proceedings to be completed at the earliest. It observed that indefinitely blocking a taxpayer's ITC can have serious civil consequences and cannot be permitted.

It observed that the GST authorities have a separate mechanism under Section 79 of the GST Act for recovery of tax after completion of assessment proceedings. It held that instead of continuing an ITC restriction indefinitely, the authorities should complete the assessment and, if necessary, proceed with recovery in accordance with law.

The Bench directed the concerned authority to forthwith unblock the ITC lying in the petitioner's Credit Ledger. It clarified that the authorities were free to complete any pending assessment proceedings and initiate recovery proceedings in accordance with law.

Accordingly, the High Court disposed of the writ petition with no order as to costs.

For Petitioner: M.A.Mudimannan, Advocate 

For Respondent: I. Dinesh, AGP (Tax)