King Enterprises vs. Union Of INDIA And Ors

Held

The Court held that the blocking of Input Tax Credit (ITC) in the Petitioner's electronic ledger to an extent exceeding the available balance was impermissible. The Court reasoned that the arguments presented by the Respondents ran contrary to established decisions of the Gujarat, Telangana, and Delhi High Courts, as well as a previous decision of the Bombay High Court itself in Rawman Metal & Alloyes. These High Courts had consistently held that "negative blocking" of ITC, where the blocked amount exceeds the available credit in the ledger, is ultra vires Rule 86A. The Court adopted the reasoning from its own decision in Rawman Metal & Alloyes, which had considered and distinguished the contrary view taken by the Calcutta High Court and the Allahabad High Court's decision relied upon by the Respondents. Consequently, the Court quashed and set aside the impugned communication/order dated January 8, 2025, to the extent it purported to block ITC beyond Rs. 7,06,770/-. The blocking of ITC to the extent of Rs. 7,06,770/- was not objected to by the Petitioner and was therefore upheld. A consequential Writ of Mandamus was issued directing the Respondents to unblock the excess ITC within 15 days.

Facts

The Petitioner, King Enterprises, challenged a communication/order dated January 8, 2025, issued under Rule 86A of the Central Goods and Services Tax Rules, 2017. This order blocked the Petitioner's Input Tax Credit (ITC) by Rs. 2.66 Crores. However, as of the date of the order, the Petitioner's electronic ledger only had Rs. 7,06,770/- available as ITC. The impugned order thus sought to block an amount exceeding the available credit, a situation referred to as "negative blocking". The Respondents defended the order, arguing that Rule 86A permits blocking of fraudulently availed and utilized ITC, even if it exceeds the ledger balance, to prevent loss to government revenue. They cited an Allahabad High Court decision in support.

Key Issues

1. Whether the blocking of Input Tax Credit (ITC) in the Petitioner's electronic ledger to an extent exceeding the available balance, under Rule 86A of the CGST Rules, 2017, is permissible. (Question of law) Petitioner's Argument: The Petitioner contended that the impugned order, which sought to block ITC beyond the available balance in their electronic ledger, was invalid. They relied on decisions from various High Courts, including Gujarat, Telangana, and Delhi, which held such "negative blocking" to be ultra vires Rule 86A. Respondents' Argument: The Respondents argued that Rule 86A(1)(a) to (d) allows an authorized officer to prevent the debit of an amount equivalent to fraudulently availed credit, even if it exceeds the ledger balance. They asserted that this action creates a lien to secure revenue interests and is not for recovery. They cited the Allahabad High Court's decision in R. M. Dairy Products LLP vs. State of U.P & others, which held that Rule 86A allows amounts to be held back and creates a lien without actual recovery.