The Court rules the continuation of Input Tax Credit block beyond the one-year statutory period as unlawful under Rule 86A(3) of the CGST Rules, 2017.
In a significant ruling, the Bombay High Court has directed the unblocking of NZS Traders Pvt. Ltd.'s Input Tax Credit (ITC) after determining that the block continued unlawfully beyond the one-year statutory limit mandated by Rule 86A(3) of the Central Goods and Services Tax (CGST) Rules, 2017. The judgment, delivered by a division bench comprising Justices G.S. Kulkarni and Aarti Sathe, underscores the necessity for strict adherence to statutory timelines in the imposition of restrictions on electronic credit ledgers.
NZS Traders had approached the court with a writ petition challenging the continued blocking of their ITC, initially imposed on February 16, 2024. The petitioner argued that the restriction should have been lifted by February 2025, as per Rule 86A(3), which the respondents had failed to do, thus necessitating judicial intervention.
The Department, in its reply affidavit, acknowledged that the restriction should not extend beyond the prescribed one-year period, yet contended that the GST registration of NZS Traders had been cancelled, which could impact the unblocking of the credit.
The court, however, dismissed the Department's argument, asserting that the statutory provision under Rule 86A(3) automatically lifts the restriction after one year, independent of any action or inaction by the Department. The judges emphasized that the benefit of unblocking directly flows from the statutory provisions, relieving the petitioner from the burden of seeking judicial intervention for enforcement.
This decision is in line with the precedent set in the Seya Industries Ltd. case, where the court held that continuing a restriction beyond the statutory period was impermissible. The judgment also clarifies that issues related to the cancellation of GST registration and the subsequent eligibility or utilization of ITC must be addressed within the framework of the GST Act and its rules, separate from the statutory entitlement to credit unblocking.
The court concluded by setting aside the February 16, 2024, blockage of NZS Traders' credit, marking it null post the one-year expiry. It left all other contentions and potential actions by both parties open for future legal proceedings as per the law.
The ruling serves as a crucial reminder of the legal boundaries within which tax authorities must operate and reinforces the protection of taxpayer rights under the GST framework.
Bottom Line:
Rule 86A(3) of the CGST Rules, 2017 mandates that restriction on the electronic credit ledger cannot continue beyond a period of one year from the date of imposition. Blocking of credit that continues beyond the statutory period is invalid and must be lifted.
Statutory provision(s): Rule 86A(3) of the CGST Rules, 2017, Article 226 of the Constitution of India
NZS Traders Pvt. Ltd. v. Union of India, (Bombay)(DB) : Law Finder Doc id # 2877962
