The Delhi High Court, in Best Crop Science Pvt. Ltd. v. Principal Commissioner, CGST Commissionerate, Meerut & Ors., considered a batch of writ petitions challenging orders passed under Rule 86A of the Central Goods and Services Tax Rules, 2017, whereby the departmental authorities had blocked input tax credit in the electronic credit ledgers of the petitioners in excess of the credit available therein, resulting in the creation of artificial negative balances.

The petitioners contended that Rule 86A empowers the authorities only to restrict debit of the input tax credit that is available in the electronic credit ledger at the time of passing of the order. It was argued that the rule does not authorise blocking of future credits or creation of negative balances, which effectively disables the taxpayer from utilising subsequently accrued legitimate input tax credit for discharge of tax liabilities. Such action, according to the petitioners, amounted to deprivation of property without authority of law and was contrary to Articles 265 and 300A of the Constitution of India.

The Revenue asserted that Rule 86A permits blocking of credit equivalent to the amount of allegedly fraudulent or ineligible input tax credit, irrespective of the balance available at the time of issuance of the order. It was argued that the power to “not allow debit” was not confined to the existing credit balance and that purposive interpretation was necessary to safeguard revenue interests.

The High Court undertook an exhaustive examination of the statutory scheme of the CGST Act relating to input tax credit, the nature of ITC as a valuable statutory right, and the scope of Rule 86A. The Court held that Rule 86A is a drastic power intended as a temporary protective measure and must be strictly construed. On a plain reading of the rule, the Court observed that the existence of input tax credit available in the electronic credit ledger is a sine qua non for invocation of Rule 86A.

The Court concluded that Rule 86A does not authorise blocking of input tax credit beyond what is available in the electronic credit ledger at the relevant time, nor does it permit creation of an artificial negative balance. Blocking future credits or preventing utilisation of subsequently accrued legitimate ITC was held to be beyond the scope of the rule. The Court emphasised that Rule 86A is not a recovery mechanism and cannot be used to indirectly achieve what the statute does not expressly permit.

Accordingly, the Delhi High Court set aside the impugned orders to the extent they blocked input tax credit in excess of the available balance and created negative balances in the electronic credit ledgers of the petitioners.
The Court clarified that while the authorities are not precluded from taking action in accordance with law, the exercise of powers under Rule 86A must strictly conform to its statutory limits.

 SOURCE LINK- https://www.mytaxexpert.co.in/uploads/1768213003_BestCropSciencePvt.Ltd.vsPrincipalCommissionerCGSTCommissionerateMeerutDelhiHighCourt.pdf

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