• Dated 25^th July, 2025

Supreme Court Upholds Delhi HC Ruling: Negative Blocking of ITC under Rule 86A Not Permissible

Brief Facts:

The dispute arises from the Delhi High Court's judgment in the case of Super Products (Regd.) vs. Director General of Goods and Service Tax Intelligence, Gurugram, where the petitioner had challenged the blocking of its Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules, 2017. The High Court had held that the blocking order, which resulted in a negative balance in the ECL, was unsustainable in law, as Rule 86A was not intended to operate as a recovery mechanism but merely as a temporary protective measure. Dissatisfied with this ruling, the Department (DGGI) preferred a Special Leave Petition (SLP) before the Hon'ble Supreme Court of India, seeking to overturn the High Court's order. The central issue remained the legality of "negative blocking" of ECL under Rule 86A, where the authorities had imposed a debit freeze in excess of the available ITC.

Assessee's Contention:

The respondent company relied on the High Court's well-reasoned judgment, arguing that Rule 86A cannot be interpreted in a manner that allows the creation of a negative ITC balance. They submitted that the rule is purely a temporary restriction provision and cannot be invoked as a backdoor recovery tool. The Delhi High Court had already clarified that such negative blocking amounts to a constructive demand without following the adjudication process under Sections 73 or 74 of the CGST Act. Hence, the respondent prayed for dismissal of the SLP.

Department's Contention:

The Department, represented by the Additional Solicitor General and other legal counsels, contended that the High Court erred in restricting the power of the authorities under Rule 86A. It was argued that the rule provides sufficient scope for the tax department to block credit where there is a reason to believe that such credit is ineligible or fraudulently availed. According to them, such measures, even if resulting in negative blocking, are justified for safeguarding revenue. They sought the intervention of the Apex Court under Article 136 of the Constitution of India, claiming that the High Court had unduly curtailed the department's enforcement powers under GST law.

Decision:

The Apex Court, after hearing the parties, refused to interfere with the Delhi High Court's decision. It held that no case for interference was made out under its special jurisdiction under Article 136 of the Constitution. Consequently, the Special Leave Petition was dismissed. The Court's order reinforces the principle that mere disagreement with the High Court's interpretation is insufficient to invoke the discretionary and exceptional powers of the Supreme Court unless a substantial question of law or gross miscarriage of justice is involved.

BTA's Remark

The Supreme Court's dismissal of the SLP in DGGI vs. Super Products solidifies the legal position that Rule 86A is a protective, not coercive, provision, and negative blocking is impermissible in law. It affirms the Delhi High Court's stance that recovery of wrongly availed input tax credit must proceed through formal adjudication under Section 73 or 74, and not through the backdoor route of debit restrictions in excess of available balances. This ruling sends a strong message to tax authorities to operate within the four corners of the statute and refrain from adopting measures that circumvent due process. The consistent judicial view at both the High Court and Apex Court levels is a welcome development for taxpayers seeking clarity and safeguards against arbitrary actions by the Department under GST law.

Case Reference: DIRECTOR GENERAL OF GOODS AND SERVICE TAX INTELLIGENCE Vs SUPER PRODUCTS (2025) 30 Centax 457 (S.C.) [19-05-2025].

Author: Pritam Ghosh

Edited by: Shaily Gupta