High Courts have had to settle one recurring question about Rule 86A of the CGST Rules: can authorities create a negative balance in a taxpayer’s Electronic Credit Ledger, or does the provision only permit blocking credit that exists? Most courts have answered that question the same way. In Dee Vee Projects Ltd. v. Government of Maharashtra, 2022 SCC OnLine Bom 486, the Bombay High Court held that Rule 86A permits only temporary disallowance of existing credit. Creating a debit entry beyond the available balance, the Court found, goes beyond the provision’s plain language. The Gujarat High Court applied the same logic in Samay Alloys India Pvt. Ltd. v. State of Gujarat, 2022 SCC OnLine Guj 1826. The power is drastic; it must track the statutory conditions, and it cannot rest on mere suspicion. In New Nalbandh Traders v. State of Gujarat, 2022 SCC Online Guj 1578, the Gujarat High Court added the obvious practical point: ITC blockage hits working capital, which is reason enough to insist on procedural discipline. The Punjab & Haryana High Court took the restrictive reading to its logical end in Best Crop Science LLP v. State of Punjab, 2024 SCC OnLine P&H 3425. A restriction under Rule 86A (3) lapses after one year. Re-blocking on identical material after the period expires would simply circumvent the limitation Parliament placed on the provision, and the Court said so plainly.
The contrary decisions are worth noting but should not be over-read. In M/s R.K. Transport Pvt. Ltd. v. Commissioner of CGST, 2023 SCC OnLine All 1124, the Allahabad High Court observed that Rule 86A is intended to protect revenue against prima facie fraudulent ITC claims, and that courts should be slow to interfere at the interim stage where tangible material supports the department’s satisfaction. The Delhi High Court declined to disturb a restriction in S.S. Industries v. Union of India, 2023 SCC OnLine Del 4211, where the investigation disclosed alleged circular trading and fake invoicing. The Telangana High Court’s observations in Megha Engineering & Infrastructures Ltd. v. Commissioner of Central Tax, 2019 SCC OnLine TS 782, acknowledged the department’s broad latitude in protecting revenue, though the case predates the present framework. None of these decisions disputes that Rule 86A has limits. What they say is that courts should not rush to override the department’s judgment on the merits at an early stage; a different proposition entirely. The core questions the litigation has thrown up, whether negative balances are permissible, what procedural safeguards are required, and how long a restriction can last, have largely been answered against the department. Rule 86A is a targeted, time-bound protective measure. It is not a recovery mechanism, and the courts have been consistent enough on that point to say the matter is no longer genuinely open.
