Madras High Court Clarifies Authorities Must Communicate Written Reasons When Blocking Electronic Credit Ledger Under Rule 86-A CGST Rules

Background and Context
The petitioner, a company engaged in genuine business activities, challenged the blocking of its Input Tax Credit (ITC) amounting to Rs. 4,10,94,906/- in its electronic credit ledger under the Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) regimes. The blocking was effected on the grounds of alleged transactions with non-existing dealers and suspected involvement in fake invoices. The petitioner made a representation to the respondent authorities seeking unblocking of the credit, but the representation remained pending.

Submissions and Status
The petitioner argued that the blocking of the electronic credit ledger had imposed a significant financial burden and was done without proper communication of reasons. The petitioner relied on a prior Division Bench judgment of the Madras High Court, which set out procedural safeguards under Rule 86-A of the CGST Rules. The respondent, in turn, submitted that investigations were ongoing and that a show cause notice would be issued after receipt of the investigation report. The respondent also assured the Court that the petitioner’s representation would be disposed of within two weeks.

Court’s Reasoning and Legal Principle
The Court, after considering the submissions, referred extensively to the Division Bench judgment in W.A. No. 2341 of 2021, which interpreted Rule 86-A of the CGST Rules. The Court reiterated that the power to block the electronic credit ledger is a drastic one and must be exercised strictly in accordance with the rule, which requires the authority to have reasons to believe that the credit has been fraudulently availed or the assessee is otherwise ineligible. Crucially, the Court emphasized that such reasons must be recorded in writing and communicated to the assessee.

The Court further held that, although Rule 86-A does not expressly provide for a procedure, principles of natural justice must be read into the rule. This includes the right of the assessee to be informed of the reasons for blocking the credit ledger and to be given an opportunity to respond. The Court drew an analogy with the Supreme Court’s decision in GKN Driveshafts (India) Ltd. v. ITO, which mandates communication of reasons and an opportunity to object in the context of income tax reassessment.

Directions and Outcome
Applying these principles, the Madras High Court directed that if the petitioner wishes to submit a reply with additional evidence, it may do so within one week. The respondent is then required to fix a date for personal hearing, issue notice to the petitioner, and, after hearing, decide on the petitioner’s representation—either revoking the blocking of the electronic credit ledger or passing a speaking order with reasons for refusal. This process must be completed within two weeks of the petitioner’s reply, or within three weeks if no reply is filed.

The judgment thus reinforces the procedural safeguards and natural justice requirements that must be followed by authorities when exercising powers under Rule 86-A of the CGST Rules, ensuring transparency and accountability in the blocking of electronic credit ledgers.