Madras High Court Clarifies Strict Requirements for Blocking Input Tax Credit Under Rule 86A of CGST Rules

Background and Context
The petitioner, a manufacturer of TMT steel bars registered under the CGST and SGST Acts, challenged the blocking of Input Tax Credit (ITC) aggregating to Rs. 4,10,94,906/- in its Electronic Credit Ledger. The blockage followed searches at the petitioner’s premises and subsequent investigations by the tax authorities. The petitioner’s request for unblocking the credit was rejected by the authorities through a detailed speaking order, prompting the present writ petition.

Arguments and Submissions
The petitioner contended that the blocking of ITC was premature and unwarranted, especially since assessment proceedings were still pending. It was argued that any alleged misconduct by suppliers should not be attributed to the petitioner, who could not be expected to investigate every supplier’s affairs. The petitioner further submitted that the invocation of Rule 86A was akin to preventive detention, severely impacting business operations and risking the livelihood of nearly 500 employees. Reliance was placed on prior judgments where courts had ordered unblocking of ITC pending assessment, subject to certain conditions.

The Revenue, on the other hand, argued that the blockage was not merely due to unverified suppliers but was based on concrete findings. Inspections revealed that the suppliers in question were operating from vacant premises lacking the infrastructure to handle the goods, and that there was no evidence of actual movement of goods as per the invoices. The Revenue asserted that the materials collected demonstrated fraud, justifying the invocation of Rule 86A.

Court’s Reasoning and Legal Principle
The Court examined the scope and requirements of Rule 86A of the CGST Rules, 2017, which empowers authorities to block ITC where there are reasons to believe that credit has been fraudulently availed or is otherwise ineligible. The Court emphasized that this power is drastic in nature and must be exercised with due care, supported by adequate material and strict adherence to statutory parameters. The necessity for a reasoned and speaking order was reiterated, ensuring that the assessee’s representation is duly considered.

Upon reviewing the impugned order and the materials on record, the Court found that the authorities had provided specific reasons for blocking the credit, including findings that the suppliers were fake entities and that the transactions were non-genuine. The Court noted that the evidence, such as the absence of vehicle movement in CCTV footage and manipulation of records, substantiated the Revenue’s conclusion of fraud.

The Court rejected the petitioner’s argument that the blockage was disproportionate, noting that the action was limited to the credit relating to the four disputed transactions and that the petitioner’s substantial turnover undermined the claim of business paralysis. However, the Court also cautioned the Revenue against indefinite blockage and directed that consequential proceedings be completed expeditiously.

Decision and Outcome
Concluding that the requirements of Rule 86A had been met and that the authorities had acted on adequate material with objective consideration, the Madras High Court dismissed the writ petition. The Court found no merit in the petitioner’s challenge and closed the connected miscellaneous petitions, while directing the Revenue to proceed with the assessment without undue delay.