Rule 86A Without a Live Balance? AP High Court Says "Yes."
Suguna Sponge and Power Pvt. Ltd. v. Superintendent of Central Tax, W.P. No. 11338 of 2024 (decided 13 Dec 2024), [2024(12)LCX0518]
Executive Snapshot
In a detailed ruling with significant compliance consequences, the Andhra Pradesh High Court (Division Bench: Justice R. Raghunandan Rao and Justice Maheswara Rao Kuncheam) dismissed the writ petition of Suguna Sponge and Power Pvt. Ltd. challenging the negative blocking of Rs. 19,73,299 under Rule 86A of the CGST Rules, 2017. The Court aligned with the Calcutta and Allahabad view that Rule 86A can be invoked even if there is no live ITC balance in the electronic credit ledger at the time of blocking, provided "reasons to believe" exist that such credit (i.e., the impugned credit) was fraudulently availed or is otherwise ineligible. The Bench also rejected procedural attacks on authorization, alleged "direction from above," and sufficiency of reasons-while pointedly urging the administration to fix the portal's character limit so that reasons can be recorded more fully.
The Story So Far: Facts & Timeline
Petitioner: Suguna Sponge and Power Pvt. Ltd., a registered taxpayer under GST.
Dispute Trigger: Order Ref. BL3703240000056 dated 20.03.2024-the Assistant/Deputy Commissioner blocked the petitioner's electronic credit ledger for Rs. 19,73,299 under Rule 86A.
Revenue's Allegation: Petitioner allegedly availed/used ITC rooted in supplies from M/s Prime Trading Company, suspected to be a non-existent / fake entity issuing invoices without movement of goods, purportedly to generate passing credit for buyers.
Petitioner's Response: Letters dated 26.03.2024 and 03.04.2024 sought particulars; the department answered on 01.04.2024 flagging the above supplier and called upon the petitioner to reverse/pay by 15.04.2024, followed by more correspondence on 12.04.2024.
Writ Relief Sought: Quash the blocking; declare it unconstitutional/ultra vires; permit re-availing ITC recovered during filing of GSTR-3B (March 2024); interim suspension of the negative block.
What the Petitioner Argued
1. No live balance → No Rule 86A: Rule 86A permits blocking only credit "available" in the electronic credit ledger. On the blocking date, no ITC was available-hence, the provision could not be invoked.
2. Meaning of "availed": ITC is "availed" only when taken in returns and credited to the ledger; if not available, you cannot "block" it.
3. Extraordinary power, not routine: Given its drastic effect, the authority must examine past tax conduct and proportionality.
4. No reasons / non-speaking order: The portal entry was a bald allegation ("fake persons"), not proper reasons to believe.
5. Direction from higher-ups: The officer allegedly acted only at the Commissioner's behest (relying on Radha Krishan Industries (SC) to resist external direction and mandate independent application of mind).
6. No valid authorization: Rule 86A requires Commissioner's authorization; what's produced is either not from the Commissioner or is a general (non-specific) authorization that does not satisfy Rule 86A's requirement.
How the Revenue Answered
1. Blocking despite zero live balance: Calcutta and Allahabad High Courts allow 86A blocking even when the current ledger balance is nil, if the impugned credit was wrongfully availed/utilized (relying on Basanta Kumar Shaw [2022(07)LCX0086]; R.M. Dairy Products LLP [2021(07)LCX0157]).
2. Fake/non-existent suppliers: The petitioner's past compliance is irrelevant if the impugned ITC is traceable to bogus entities.
3. Reasons were given (practically): The portal has character limits; a brief ground was entered there and elaborated subsequently in communications.
4. Independent satisfaction & authorization: There was due authorization under a May 2023 delegation (Special All-India Drive) empowering the Assistant Commissioner for Kurnool & Anantapur; no proof that the officer acted mechanically or solely on direction.
5. General vs specific authorization: The language of Rule 86A is satisfied by the authorization produced; it need not be a bespoke, one-case-only warrant.
The Core Question
Does Rule 86A require the presence of a live ITC balance in the electronic credit ledger at the time of blocking?
Gujarat & Telangana view: Yes-only "credit available" can be blocked.
Allahabad & Calcutta view: No-"such credit" refers to the impugned credit; blocking an equivalent amount is permitted even if the live balance is nil at the time of the order.
The Court's Ruling & Reasoning
1) Authorization & "Direction from Above"
The Bench found valid delegation: by 18.05.2023, the Commissioner had delegated power to the Assistant Commissioner for the divisions concerned as part of a nationwide drive against fake registrations.
The material on record did not establish that the officer merely executed a top-down command without application of mind. A communication from the Joint Commissioner asked for verification and appropriate action-it was not a blanket instruction to block everyone's ledgers.
Therefore, both contentions failed: authorization existed and the officer's decision wasn't shown to be a mechanical, dictated act.
2) Sufficiency of Reasons & Natural Justice
The Court acknowledged the portal reason was cryptic ("barely pass muster").
However, subsequent communications fleshed out the allegations; and, importantly, Rule 86A blocking is not recovery-it merely disables utilization/refund of suspect credit pending adjudication under Sections 73/74 read with Section 122.
On balance, the Court held the principles of natural justice were satisfied in the circumstances-and took a moment to urge the GSTN/administration to expand portal fields so that officers can record full reasons without technical constraints.
3) Interpreting Rule 86A: "Credit Available" vs "Such Credit"
Textual key: The opening limb of Rule 86A(1) refers to "credit of input tax available in the electronic credit ledger … fraudulently availed or ineligible," while the operative direction in clause (d) empowers the officer to "not allow debit of an amount equivalent to such credit."
The Division Bench parsed the phrase "such credit" as referring to the impugned ITC (i.e., the credit whose fraudulent/ineligible character is the reason to believe)-not to the quantum presently available in the ledger.
Thus, even if the current ledger balance is zero, the officer may block an amount equivalent to the impugned credit so that the taxpayer cannot set off future liabilities or claim refunds while the issue is being adjudicated.
Express alignment: The Court expressly declined to follow the Gujarat and Telangana view and agreed with the Allahabad and Calcutta line.
4) Outcome
Writ petition dismissed; no costs.
The negative block stands, subject to Rule 86A(3) (automatic lapse after one year unless lifted earlier).
Why This Matters: Practical & Doctrinal Implications
A. The Compliance Reality Check
Blocking can bite even at NIL balance: Taxpayers cannot evade Rule 86A by utilizing their balance before an order lands. Authorities may block an equivalent amount prospectively, curbing future utilization/refund.
Due diligence on vendors is existential: The case again underlines the risk of fake/non-existent suppliers. Failing to vet counterparties can lock up working capital via prolonged blocking.
B. The Federal Patchwork (and Forum Risk)
With AP now siding with Allahabad & Calcutta, there's a clearer split from Gujarat & Telangana. This increases forum risk: the venue of litigation matters until the Supreme Court settles the interpretation.
Businesses operating across states must brace for divergent outcomes on the same provision.
C. Procedural Lessons for Both Sides
For the Department:
Record clear, case-specific reasons; keep contemporaneous internal notes to demonstrate application of mind.
Attach/serve a detailed note promptly if the portal truncates reasoning; maintain an auditable trail.
Revisit blocking periodically (Rule 86A(2)) and lift promptly once the basis no longer exists.
For the Taxpayer:
Seek complete reasons and supplier-level particulars (GSTIN, invoice chain, movement proofs relied upon).
If reasons are vague, document the deficiency and seek review under Rule 86A(2); if no relief, consider writ on procedural grounds (no reasons, no nexus, no authorization, or over-stay beyond one year).
Simultaneously prepare for the merits: collate goods movement evidence (e-way bills, weighbridge slips, LR/GRs), payment trail (bank), supplier KYC (site verification reports, electricity bills, photos), stock records, GSTR-2B matching, and communication trail.
Where This Leaves the Law on Rule 86A
Trigger Threshold: "Reasons to believe" that impugned credit was fraudulently availed or ineligible, with authorization by the Commissioner or an officer authorized by the Commissioner (not below Assistant Commissioner).
Scope of Blocking: Amount equivalent to the impugned credit-irrespective of the current balance-can be stuck for utilization/refund.
Tenure: Automatic sunset after one year from imposition (Rule 86A(3)) unless lifted earlier under Rule 86A(2).
Nature: Interim protective measure, not tax recovery; merits are adjudicated under Sections 73/74 (+ possible Section 122 penalty).
Procedural Expectations:
Reasons must be recorded in writing; cryptic portal entries can be cured by timely supplementary communication, but the safer course is to ensure full reasons upfront.
Authorization must exist and be demonstrable; general but valid delegation in a drive against fake ITC can suffice if it covers the officer and area.
A Quick Compare: Divergent High Court Approaches
Gujarat & Telangana (narrow): Emphasis on the words "credit … available" → Block only if live balance exists at the time of order.
Allahabad, Calcutta, Andhra Pradesh (broad): Emphasis on "such credit" → Block an equivalent amount regardless of live balance, because the rule targets the fraudulent/ineligible quantum, not the momentary ledger status.
Compliance takeaway: In broad-view jurisdictions, speedy pre-blocking utilization won't insulate you. In narrow-view jurisdictions, live balance still matters-but relying on geography is a risky strategy given possible appeals and centralized drives.
Strategic Playbook for Businesses
1. Vendor Onboarding & KYC:
Collect and retain robust KYC: GST registration copies, addresses, photographs of premises, utility bills, and site visit notes.
Validate returns behavior (GSTR-1 filing regularity), 2B visibility, and e-invoice compliance (if applicable).
For high-risk commodities (metals, scrap, textiles, etc.), consider enhanced due diligence and periodic re-verification.
2. Transaction Hygiene:
Maintain end-to-end documentation showing receipt& movement of goods: POs, gate entries, weighbridge slips, e-way bills, LRs/GRs, delivery challans, stock cards.
Ensure banking trail (no cash-settled anomalies); reconcile GSTR-2B meticulously.
Watch for supplier red flags: newly registered, frequent address changes, large volumes incongruent with profile, abnormal pricing.
3. When 86A Hits:
Immediately request the written "reasons to believe" and the exact supplier-invoice list and evidence relied on.
File a speaking representation with documents rebutting fakery/non-existence; seek review under Rule 86A(2) with a clear timeline request.
If refunds are stuck, evaluate alternative cash flow measures; explore banking/working capital lines to bridge.
Mark your calendar for the one-year sunset; if the block persists beyond that date without fresh order, seek lifting or consider writ.
4. Litigation Choices:
Procedural challenges (no authorization, no reasons, non-application of mind, beyond one year) can deliver quicker relief than battling on merits of "fake supplier."
Evaluate forum strategy carefully, but don't rely on inter-State divergence; the trend is moving toward the broad view and a possible Supreme Court resolution.
What the Department Should Do (and the Court Nudged)
Fix the portal: Expand text fields so that officers can record full, specific reasons-this reduces litigation on NSJ (natural justice) grounds.
Standardize templates for 86A reasons capturing supplier trail, invoice mapping, movement evidence, and risk triggers.
Periodic review of blocks with a documented checklist, recording why a block is continued or lifted before the one-year mark.
Final Word: The "Equivalence" Principle Reaffirmed
Suguna Sponge cements, in Andhra Pradesh, the proposition that Rule 86A targets the integrity of the ITC itself, not the ledger snapshot. If the impugned quantum is suspect, an equivalent amount may be frozen-even if your balance reads zero today. That brings coherence to the rule's protective design: ring-fencing revenue until the 73/74 merits are adjudicated.
For taxpayers, the message is unambiguous: vendor diligence is your first line of defense; documentary granularity is your second; and swift, well-reasoned representations are your third. For the administration, the ruling is both an endorsement and a caution: use the power judiciously, record reasons transparently, and respect the one-year lid.
Bottom line: In Andhra Pradesh (and in kindred jurisdictions), Rule 86A is not a race against your ledger balance. It's a substantive check on the quality of your credit.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.