The Madurai Bench of the Madras High Court, in its recent order dated August 7, 2025, addressed the contentious issue of blocking the Electronic Credit Ledger (ECL) under Rule 86A of the Goods and Services Tax (GST) Rules, 2017—an issue that has garnered conflicting judicial opinions across various high courts in India.
Background of the Case:
The writ petition was filed by Indian Traders, contesting the action of the Commercial Tax authorities who blocked their ECL to the tune of ₹3,15,70,792, citing alleged fraudulent or ineligible Input Tax Credit (ITC) for the period May 2025. On the date of the order, the actual ITC balance was only ₹19,19,919, leading to a "negative blocking" effect, with authorities seeking to block future credits up to the assessed wrongful amount.
The petitioner raised questions on both procedural and substantive grounds:
- Alleged lack of authorization and jurisdiction as mandated by the CBIC GST Policy Wing circular dated November 2, 2021, which prescribes monetary limits and proper officer designations for such actions.
- Absence of objective satisfaction or written reasons provided prior to the blocking, which is mandated by Rule 86A.
- The issue of “negative blocking” where ITC is blocked beyond the available balance, restricting future utilization.
Divergence in Judicial Opinion:
The case highlighted a split in judicial opinion regarding the scope of Rule 86A:
- Delhi High Court and Affirmation by Supreme Court: The petitioner relied on the Delhi High Court’s decision in "Raghav Agarwal v. Commissioner of Central Tax" (affirmed by the Supreme Court), which held against negative blocking of ITC.
- Contrary Views by Other High Courts: Respondents cited contrasting decisions from Allahabad, Calcutta, Andhra Pradesh, and single-judge benches of the Madras High Court ("Skanthaguru Innovations") that upheld the power of authorities to block future credits but not just the available balance.
The court quoted various extracts to clarify the Rule’s interpretation. Notably, it referenced the Allahabad High Court’s observation that Rule 86A is a revenue protection measure, attaching a lien up to the specified amount, including credits earned after the blocking order.
Madras High Court's Analysis and Order:
Justice C. Saravanan leaned towards the precedent set by the Madras High Court in "Skanthaguru Innovations," upholding negative blocking within the framework of Rule 86A. However, he stressed the need to balance the interest of the taxpayer and the revenue.
Key Directions:
- Proportional Payment Mechanism: The court directed that, going forward, the petitioner shall discharge future GST tax liabilities partly from the blocked credit ledger and partly in cash, in equal proportion (50:50). This partial relaxation aims to mitigate business hardship while protecting revenue interests.
- Time-Limited Relief: This proportional arrangement would continue for up to one year or until the final disposal of the show cause notice issued under Form GST DRC-01.
- Rejection of Jurisdictional Objection: The court held that internal authorizations within the tax hierarchy, particularly in light of pending proceedings, met the requirements of the relevant GST circular.
Conclusion: Evolving Judicial Consensus:
This judgment exemplifies the complexity and divergence in interpreting Rule 86A of the GST Rules. While some high courts have disfavored negative blocking, others including the Madras High Court have taken a broader view, allowing authorities to block future credits to secure revenue in cases of alleged wrongful ITC availment. The court’s nuanced approach allowing partial use of blocked credits reflects an attempt to balance legal principles with practical business realities.
Taxpayers subject to ECL blocking under Rule 86A should thus keenly monitor ongoing judicial developments, prepare robust challenges based on available precedents, and engage with authorities proactively to seek relaxations where warranted.
Source:
Madras HC – Indian Traders vs The Commercial Tax Officer and Ors. [W.P(MD)No. 21670 of 2025]
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