Bombay High Court Sets Aside ITC Block On Suspicion Of Ineligible Credit, Says It Ceases After One Year

The Bombay High Court has recently set aside the blocking of Input Tax Credit (ITC) of NZS Traders Pvt. Ltd., holding that such a restriction made on apprehension of fraud cannot continue beyond one year and ceases to operate by law.

A Bench of Justice G. S. Kulkarni and Justice Aarti Sathe explained that Rule 86A empowers GST authorities to block a taxpayer from using the credit available in its electronic credit ledger if they have reasons to believe that the credit has been wrongly or fraudulently availed.

This prevents the taxpayer from using that credit to pay GST dues. The Rule, however, also clearly provides that such blocking can remain in force only for one year from the date it is imposed.

The Bench stated, “ Rule 86A(3) of the CGST Rules, 2017 clearly mandates that the restriction on the electronic credit ledger cannot continue beyond a period of one year from the date of imposition of such restriction. In the present case, the restriction was imposed on 16th February 2024, and thus, upon expiry of one year, the same could not have been continued. This position is also acknowledged by the Department in its reply affidavit. Therefore, by operation of law, the credit ought to have been unblocked. The Petitioner was not required to approach this Court seeking a declaration, as the benefit flows directly from the statutory provision itself.”

NZS Traders Pvt. Ltd. contended that its ITC amounting to Rs 4.25 crore was blocked on February 16, 2024, without issuance of a show cause notice, personal hearing, or any order.

It argued that although the one-year period expired in February 2025, the credit continued to remain blocked, in violation of Rule 86A(3) of the CGST Rules, which provides that such restriction ceases to have effect after one year from the date of its imposition

The Department, in its affidavit, also acknowledged that the restriction cannot operate beyond one year.

Rejecting the Department's contention that the petitioner's GST registration had been cancelled and that unblocking would depend on further proceedings, the court held that such a submission cannot be accepted in the present proceedings.

It further observed that the right to use the credit is restored automatically once the one-year period ends and does not require any further order.

Accordingly, the High Court set aside the blocking dated February 16, 2024, holding that it had ceased to operate upon expiry of one year.

For Petitioners: Advocates Bharat Raichandani with Bhagrati Sahu

For Respondents: Advocates Karan Adik with Sangeeta Yadav for Respondents (UOI), Jyoti Chavan, Addl. GP with Amar Mishra for State