"Minus Credit, Plus Chaos": Supreme Court Draws a Red Line on ‘Negative' ITC Blocking under Rule 86A

1) Why this issue mattered more than it first appeared

Input Tax Credit (ITC) is not a "concession" in the GST ecosystem-it is the oxygen that keeps the tax chain neutral and the working-capital cycle breathing. The moment credit is frozen, businesses feel it instantly: cash outflows rise, margins shrink, and compliance turns from routine to triage.

Rule 86A was introduced as an emergency brake. It allows the department, in narrowly defined circumstances, to restrict utilisation of ITC lying in the Electronic Credit Ledger (ECL) where there are "reasons to believe" that the credit is ineligible or fraudulently availed. On paper, it is a protective tool-temporary, conditional, and meant to prevent revenue leakage while the law takes its course.

But what began as a preventive measure took an unusual turn in practice. In some cases, authorities started blocking amounts beyond the ITC actually available in the ledger, effectively forcing the ledger into a negative position. The result was a new phenomenon-"negative ITC blocking"-where a taxpayer's future credits or future utilisation got indirectly curtailed to "make good" an alleged past wrong, without any adjudication.

That single administrative leap created a serious legal question: Can Rule 86A be stretched from "blocking existing credit" to "creating a future recovery mechanism"? Courts across Delhi answered with a clear "no," and the Supreme Court's dismissal of departmental SLPs effectively sealed that position.

2) Rule 86A: what the law actually authorises

Rule 86A is designed with a very specific architecture. It permits an authorised officer to disallow debit of ITC available in the ECL if certain conditions are met and specified grounds exist (such as invoices from non-existent suppliers, credit without receipt of goods/services, tax not paid to the government, etc.). The important part is not just what it allows, but also what it does not.

A few core features define Rule 86A's limits:

Most critically, the Rule operates separately from the Act's adjudication and recovery framework. When the department believes ITC is wrongly availed or wrongly utilised, the statute already provides a complete route: proceedings under Section 73 or Section 74, followed by recovery measures under Section 79, if warranted.

So, conceptually, Rule 86A is a shield against immediate misuse-not a sword to extract money first and argue later.

3) How "negative blocking" entered the system-and why it was so disruptive

The practical innovation was simple but impactful: instead of limiting the block to the credit sitting in the ledger, officers sometimes blocked a higher amount-greater than what the taxpayer actually had. That surplus "block" pushed the ledger into an artificial deficit.

This had three immediate consequences for businesses:

1. Forced cash payment for future liabilities

Even if the taxpayer earned genuine credit later, the blocked amount hovered like a ceiling on utilisation, compelling the taxpayer to pay output tax in cash.

2. Working capital shock

GST is designed to avoid cascading. Negative blocking reversed that logic and created instant liquidity stress-especially for businesses operating on thin cash flows.

3. Backdoor recovery without due process

The most serious issue: negative blocking behaved like an indirect recovery mechanism. It pressured taxpayers to part with cash (or accept reversals) even before the department completed adjudication under the Act.

In short, the measure stopped being a "preventive lock" on suspect credit and started looking like a "collection tool"-but without the statutory checks that accompany assessment and recovery.

4) Courts step in: Rule 86A cannot be turned into a recovery shortcut

(A) Delhi High Court's pivotal reasoning: Best Crop Science Pvt. Ltd.

In Best Crop Science Pvt. Ltd. [2024(09)LCX0139], the Delhi High Court undertook a careful reading of Rule 86A and drew a firm boundary around it. The Court's reasoning (in substance) was:

This distinction is crucial. Blocking credit available today is a preventive step; forcing a taxpayer to "fund" alleged past liability through tomorrow's restrictions is punitive recovery by another name.

(B) The view becomes consistent: multiple Delhi HC decisions

The logic did not remain confined to one case. The Delhi High Court repeated the same principle in subsequent matters, including:

Across these rulings, the theme remained stable: Rule 86A cannot be expanded to block amounts beyond the ledger balance; negative blocking is beyond the rule's scope.

(C) Supreme Court's closure: SLPs dismissed

The department carried the battle upward. The Supreme Court dismissed the SLPs filed against the Delhi High Court view in:

While such dismissal orders are brief, their impact in the real world is unmistakable: the departmental challenge failed, and the High Court's interpretation stands reinforced.

5) The principles that now stand "settled"

From the combined judicial reasoning, a clear rulebook emerges:

1. Rule 86A is preventive, not punitive

It aims to stop questionable credit from being used, not to penalise or collect.

2. Blocking is limited to the credit actually lying in the ECL If the ledger shows Rs.X, the block cannot exceed Rs.X.

3. You cannot undo past utilisation by controlling future utilisation

If the department alleges wrongful utilisation earlier, it must proceed through statutory adjudication.

4. Recovery requires a legal determination

Sections 73/74 are not optional rituals; they are mandatory pathways for establishing liability.

5. Executive convenience cannot replace legislative design

The GST law consciously separates restriction from recovery. Rule 86A cannot be used to collapse that distinction.

6) What this means for taxpayers: practical takeaways

These rulings are not merely academic-they change on-ground outcomes.

(i) If your ledger is blocked beyond balance, you have a strong legal footing

A "negative" block is now widely viewed as ultra vires. Taxpayers can contest such action as exceeding Rule 86A.

(ii) Demand the statutory route

If the department believes ITC is ineligible, the correct approach is issuance of notice, adjudication, and then recovery-not ledger engineering.

(iii) Focus on documentation and audit trail

Even when challenging negative blocking, businesses should strengthen their foundational records: invoices, e-way bills, GRNs, payment proofs, supplier compliance snapshots, and reconciliation notes. Courts protect due process, but taxpayers still benefit massively from clean facts.

(iv) Seek speaking orders and recorded "reasons to believe"

Rule 86A depends on "reasons to believe," not "reasons to suspect." If the record is vague, mechanical, or unsupported, it becomes easier to challenge.

7) What this means for the administration: better tools, not bigger shortcuts

From a governance perspective, the decisions are not anti-revenue. They are pro-structure.

Revenue protection must operate within the lanes of the Act. If Rule 86A becomes an all-purpose weapon, it will trigger predictable consequences: more writ petitions, more interim reliefs, higher compliance friction, and lower trust.

The law already offers strong enforcement routes-search, seizure, summons, adjudication, provisional attachment where justified, and recovery after determination. The message from the judiciary is simple: use the right tool for the right job.

8) Policy and system fixes that can prevent the next wave of litigation

With clarity now established, the next step is institutional alignment. Some sensible measures could include:

(A) A clear CBIC clarification

A circular can explicitly state that blocking under Rule 86A cannot exceed available credit and that negative ledger creation is impermissible. This would ensure uniformity across formations and reduce avoidable disputes.

(B) SOPs with accountability markers

Standard Operating Procedures can define:

(C) GSTN guardrails (the simplest fix)

The cleanest solution is technical: the portal can restrict blocking to the available balance by design. When software prevents excess, discretion stops becoming controversy.

(D) Training that separates "restriction" from "recovery"

Capacity building can focus on the statutory difference between preventive actions and demand/recovery proceedings-so field actions align with law and courts are not burdened with repetitive challenges.

9) Conclusion: Extraordinary power needs ordinary discipline

Rule 86A exists for a reason. Fraud networks do exploit ITC, and the state must have protective tools to prevent immediate leakage. But protection cannot morph into punishment without process.

Negative blocking attempted to do exactly that-convert a temporary restraint into a cash-compulsion mechanism. The Delhi High Court's line of decisions, now effectively affirmed through dismissal of the department's SLPs, restores the statutory balance: block what exists, adjudicate what is disputed, recover what is determined.

For taxpayers, the message is reassuring: due process is not optional in GST.

For the administration, the lesson is equally valuable: efficiency is best achieved by following the law's design-not by bending it.

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.