Courtesy: Mayank Pratap Singh
The Goods and Services Tax regime, introduced by the Central Goods and Services Tax Act, 2017, rests on the uninterrupted flow of Input Tax Credit from supplier to recipient. Section 16 of the CGST Act, 2017, governs the eligibility and conditions for availing Input Tax Credit, and the credit, once the conditions under Section 16 are fulfilled, becomes a vested statutory right of the taxpayer. Section 49 of the Act provides for the maintenance of an Electronic Credit Ledger, from which the available credit may be utilised towards tax liability. Rule 86A of the CGST Rules, 2017 carves out an exception to this scheme by permitting a competent authority to block the credit available in the Electronic Credit Ledger, where it has reasons to believe that the credit has been fraudulently availed or is ineligible. The said power, being an extraordinary one, has been the subject of significant judicial scrutiny before the Allahabad High Court.
What is Rule 86A of the CGST Rules, 2017 and when can Input Tax Credit be blocked?
Rule 86A of the CGST Rules, 2017 empowers a Commissioner or an officer authorised by him, not below the rank of Assistant Commissioner, to disallow the debit of an amount from the Electronic Credit Ledger. The power can be exercised where the authority has reasons to believe that the ITC available in the ledger has been fraudulently availed, or that it is availed in contravention of the provisions of the Act or the Rules. The rule further provides that such blocking cannot exceed a period of one year.
Rule 86A of the CGST Rules is being reproduced below:
“86A. Conditions of use of amount available in electronic credit ledger.- (1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as
a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-
i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
ii. without receipt of goods or services or both; or
b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.
(2)The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit. (3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.”
The conditions that must be satisfied before invoking Rule 86A are as follows:
- Credit must be available in the Electronic Credit Ledger.
- The competent authority must have “reasons to believe” that the credit was fraudulently availed or is ineligible.
- The reasons to believe must be based on tangible material and must be recorded in writing.
- The authority must independently apply its mind to the available material before passing the order.
It bears emphasis that the fulfilment of these conditions is not a procedural formality. The Allahabad High Court has consistently treated compliance with these requirements as a jurisdictional precondition to the exercise of power under Rule 86A.
Can ITC be blocked merely based on a recommendation or an alert circular?
No. The Allahabad High Court has categorically held that ITC cannot be blocked under Rule 86A solely on the basis of a recommendation received from a subordinate officer or on the strength of an alert circular.
In M/s Pilcon Infrastructure Pvt. Ltd. v. State of U.P., the petitioner’s ITC amounting to Rs. 13,96,220/- was blocked through an email communication issued by GSTN. The only reason reflected in the Electronic Credit Ledger was “Supplier found non-functioning.” The department sought to justify the blocking by relying upon an Alert Notice issued by DGGI, Raipur, alleging that one supplier had passed on fraudulent ITC through bogus invoices. The Division Bench of the Allahabad High Court set aside the action and held that a general allegation against a supplier does not automatically establish that the recipient’s transactions were fraudulent. The Court further held that there must be material directly linking the taxpayer to the fraudulent availment of ITC, and that blind reliance on DGGI reports or alert notices without independent application of mind is impermissible. The Court held that “granting ITC and maintaining its chain is the soul of a successful GST regime.“
The principle laid down in Pilcon Infrastructure was reaffirmed and relied upon by the Allahabad High Court in M/s Shree Salasar Metals v. Union of India (decided on 27 April 2026). In that case, the petitioner’s ITC of Rs. 2,68,416/- was blocked by the Assistant Commissioner. The sole reason recorded in the order was: “As per recommendation of Superintendent (AE), Mirzapur.” The department sought to defend the order on the ground that an investigation against one of the petitioner’s suppliers had revealed suspicious transactions and an alert circular had accordingly been issued. The Court rejected this contention and set aside the order, holding that the competent authority cannot merely act upon a recommendation made by another officer. The authority is required to examine the material independently and form its own satisfaction before proceeding under Rule 86A.
What does “reasons to believe” mean under Rule 86A?
The Allahabad High Court, in the judgments referred to above, has interpreted the expression “reasons to believe” as a substantive jurisdictional requirement and not a mere formality. The following propositions may be drawn from the said decisions:
- The reasons must be recorded in writing before the order blocking ITC is passed.
- The reasons must be based on tangible material and must disclose a direct nexus between the material and the taxpayer whose ITC is sought to be blocked.
- Mere suspicion, intelligence inputs, or investigation reports pertaining to a third-party supplier do not constitute reasons to believe in respect of the recipient.
- The competent authority must arrive at its own satisfaction and cannot act as a conduit for the opinion of another officer or agency.
In the case of The Commissioner of Sales Tax, U.P. Vs M/S. Bhagwan Industries (P) Ltd., Lucknow (1973) 3 SCC 265, the Hon’ble Apex Court has interpreted the purport of reason to believe. The relevant portion is quoted below:
“11. …………Question in the circumstances arises as to what is the import of the words “reason to believe”, as used in the section. In our opinion, these words convey that there must be some rational basis for the assessing authority to form the belief that the whole or any part of the turnover of a dealer has, for any reason, escaped assessment to tax for some year. If such a basis exists, the assessing authority can proceed in the manner laid down in the section. To put it differently, if there are, in fact, some reasonable grounds for the assessing authority to believe that the whole or any part of the turnover of a dealer has escaped assessment, it can take action under the section. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction to take action under the section. Whether the grounds are adequate or not is not a matter which would be gone into by the High Court or this Court; for the sufficiency of the grounds which induced the assessing authority to act is not a justiciable issue. What can be challenged is the existence of the belief but not the sufficiency of reasons for the belief. At the same time, it is necessary to observe that the belief must be held in good faith and should not be a mere pretence.”
Does an investigation against a supplier justify blocking the recipient’s ITC?
No. The Allahabad High Court has made it clear that an investigation or proceeding against a supplier cannot, by itself, constitute sufficient ground to block the ITC of a recipient. In both the Pilcon Infrastructure and Shree Salasar Metals cases, the department’s case rested substantially on the alleged fraudulent conduct of a supplier. In both cases, the Court held that a supplier’s misconduct or non-functionality does not automatically render the recipient’s ITC ineligible or fraudulent. There must be independent material establishing that the recipient was itself a party to the fraudulent availment of credit.
The Court’s observations in this regard are of practical significance for taxpayers who are often faced with the consequence of a supplier’s default or non-compliance, over which they exercise no control. Blocking a recipient’s ITC on account of a supplier’s alleged infraction, without any material implicating the recipient, amounts to an arbitrary exercise of power and falls foul of the statutory scheme under Rule 86A of the CGST Rules.
What is Negative Blocking, and is it sustainable in the eyes of law?
Blocking of Input Tax Credit in the negative means that the credit has been blocked in excess of the amount available in the ECL at the time of the issuance of the order. In such a case, one can directly challenge the order of negative blocking before the Hon’ble Allahabad High Court, as such an exercise is in the teeth of Rule 86A of the CGST Rules, and as such, unsustainable in the eyes of law. One may refer to the judgment of the Delhi High Court in Kings Security Guard Services Pvt. Ltd. Vs. Deputy Director, Directorate General of GST Intelligence, 2024(12) TMI 1513 for further reference.
What is the remedy against an order blocking ITC under Rule 86A of the CGST Rules?
The statute does not provide a specific appellate forum against such an order. In practice, the remedy most frequently availed by aggrieved taxpayers is a Writ Petition before the Allahabad High Court under Article 226 of the Constitution of India. Given that the blocking of ITC has immediate and significant consequences for a business, including the inability to discharge tax liability from the credit ledger, the Allahabad High Court has, in several cases, entertained such writ petitions and granted relief without insisting upon the exhaustion of alternative remedies, as the same is a self-imposed restraint.
Hence, an aggrieved taxpayer whose ITC has been blocked under Rule 86A, without the competent authority having recorded independent reasons to believe in writing, or on any other ground, as advised by their counsel, may challenge such order before the Hon’ble Allahabad High Court by means of a Writ Petition under Article 226 of the Constitution of India, or avail such remedy as advised.