The Madras High Court has ruled that Electronic Credit Ledgers (ECL) of businesses suspected of fraudulently availing Input Tax Credit (ITC) can be blocked even when the ledger reflects a zero balance at the time of passing the blocking order. The judgment, delivered by Justice Krishnan Ramasamy, reaffirms the powers of authorities under Rule 86A of the GST Rules, 2017, to block ECLs to the extent of the fraudulently availed ITC.
Blocking Allowed Even After ITC Utilization
In its ruling, the Court emphasized that ITC fraud often comes to light after the fraudulent credits have already been utilized. Justice Ramasamy observed:
“In majority cases, the prosecuting authorities may not have any chance to know about the wrongful availment of ITC immediately upon such availment/utilisation. It will come to their knowledge subsequently and by that time, the ITC could have been utilised by the registered person. Keeping the said aspects in mind, Rule 86A was incorporated.”
This interpretation allows authorities to pass blocking orders even when the ECL balance is zero, ensuring that future ITC accumulation is restricted to the extent of the fraudulent credits.
Rejecting Gujarat and Delhi High Court Interpretations
The judgment diverges from earlier rulings by the Gujarat and Delhi High Courts, which had suggested that a credit balance in the ECL is a precondition for invoking Rule 86A. The Madras High Court highlighted that these interpretations did not consider the entirety of the rule.
“The second part of Rule 86A empowers the authorities not to allow the debit of an amount equivalent to the fraudulently availed credit for discharge of liabilities under Section 49,” Justice Ramasamy noted.
“If it was already utilised, the officials are also empowered to pass blocking orders to the extent of such credit, which was already utilised, along with the unutilised fraudulently availed ITC amount available in the ECL at the time of passing the blocking orders.”
The Court clarified that the rule permits “negative blocking,” ensuring that the ledger reflects restrictions even after fraudulent credits are spent.
Case Background
The ruling came in response to a petition by Chennai-based Skanthaguru Innovations, which challenged the blocking of its ECL by the Tamil Nadu Commercial Tax Officer. The company argued that its ledger had a nil balance when the blocking order was issued, citing judgments by other High Courts to support its case.
The firm further contended that simultaneous prosecution by both State and Central GST authorities was unwarranted. However, the Court found that the proceedings covered different periods, allowing both actions to continue.
Implications for Businesses
The judgment underscores the need for businesses to maintain strict compliance with GST rules, as ECL blocking can significantly disrupt financial operations. The Court remarked on the importance of such measures to curb fraudulent practices and protect the integrity of the GST system.
Court’s Takeaway
The High Court’s ruling highlights the practical challenges in detecting ITC fraud and empowers authorities to act decisively:
“At no stretch of imagination, one could construe that no blocking orders can be passed at the time of zero balance of ITC in the ECL,” the Court stated, reinforcing that authorities can block future credits to recover amounts equivalent to fraudulently availed ITC.
