The Hon’ble Bombay High Court in the case of Hemang Bipin Varaiya v. The State of Maharashtra & Ors. [Writ Petition No. 3452 Of 2026, order dated March 18, 2026] held that negative blocking of Input Tax Credit (ITC) under Rule 86A of the CGST Rules, 2017 is not permissible as the Rule mandates ‘the existence of available credit in the Electronic Credit Ledger (ECL).
Facts:
Hemang Bipin Varaiya (“the Petitioner”), proprietor of M/s. Mahavir Metal Industries, engaged in manufacture and trade of copper, brass utensils and non-ferrous metals, holding GST registration.
The State of Maharashtra & Ors. (“the Respondent”), who issued a show cause notice dated April 22, 2025 and passed an order dated June 19, 2025 under Rule 86A blocking ITC of Rs. 4.82 crores.
The Petitioner argues that the impugned order was passed in breach of principles of natural justice and without recording reasons and that the documents submitted were not considered. Further they contend that there was no balance in the ECL at the time of blocking and hence, negative blocking of ITC is not permissible under Rule 86A, and that blocking cannot exceed the balance available in the ECL.
The Respondent contended that at the time of blocking, ITC of Rs. 43,19,259/- was available in the ECL and that the ITC availed by the Petitioner pertained to non-existent or cancelled suppliers, justifying invocation of Rule 86A.
Aggrieved by the blocking of ITC resulting in a negative balance and alleging violation of Rule 86A and principles of natural justice, the Petitioner approached the Hon’ble High Court by way of a writ petition seeking quashing of the impugned order and unblocking of ITC.
Issue:
Whether ITC can be blocked under Rule 86A of the CGST Rules, 2017 when there is no available balance in the Electronic Credit Ledger, thereby resulting in negative blocking?
Held:
The Hon’ble Bombay High Court in Writ Petition No. 3452 Of 2026 held as under:
- Observed that, Rule 86A mandates that credit must be available in the Electronic Credit Ledger for the purpose of blocking and in absence of such credit, the power cannot be exercised.
- Observed that, if there is no balance available/negative balance is available in the ECL, then the same cannot be blocked.
- Noted that, negative blocking is contrary to the plain language of Rule 86A and amounts to acting beyond jurisdiction.
- Observed that, a positive balance of around Rs. 43,19,259/- was available and to that extent blocking was valid.
- Noted that, Rule 86A is a drastic power and must be strictly construed. Therefore it cannot be extended to block future or non-existent credit.
- Held that, blocking beyond available credit introduces impermissible “negative blocking,” which is not contemplated under the Rule.
- Directed that, the impugned order be quashed to the extent of Rs. 4,38,80,741/-. However blocking of Rs. 43,19,259/- is upheld and directed the Respondent to issue show cause notice for the remaining amount.
Our Comments:
The Hon’ble Bombay High Court in the case of Hemang Bipin Varaiya vs The State of Maharashtra & Ors. [Writ Petition No. 3444 of 2026, order dated March 18, 2026] held that there could not have been a negative blocking of Input Tax Credit (ITC), as it is beyond the ambit of Rule 86A of the CGST Rules, and directed restoration of ITC to the extent of Rs. 1.42 crores, observing that admissibility of ITC can be verified through issuance of a show cause notice and adjudication of liability.
The judgment follows the interpretation of Rule 86A laid down in Rawman Metal & Alloys vs The Deputy Commissioner of State Tax, Thane [Writ Petition (L) No. 10923 of 2025, order dated October 07, 2025], wherein it was held that Rule 86A is limited to blocking credit available in the electronic credit ledger and does not extend to future credit. It was further clarified that the admissibility of ITC must be determined through the issuance of a show cause notice and subsequent adjudication. Similarly, the Hon’ble Court in Seya Industries Ltd. vs. State of Maharashtra [(2024) 20 Centax 466 (Bom.)] held that restrictions imposed under Rule 86A cannot continue beyond one year and must be lifted irrespective of pending proceedings. Both decisions consistently emphasize that Rule 86A is a temporary protective mechanism rather than a punitive provision, and therefore, strict adherence to the prescribed time limit is essential.
Further, in Samay Alloys India Pvt. Ltd. vs State of Gujarat [Special Civil Application No. 18059 of 2021, order dated February 03, 2022], it was held that powers under Rule 86A cannot be exercised in the absence of any credit balance in the electronic credit ledger.
Additionally, the Hon’ble Allahabad High Court in Pilcon Infrastructure Pvt. Ltd. v. State of U.P. & Another [WRIT TAX No. 4654 of 2025, order dated October 29, 2025] held that blocking of Input Tax Credit under Rule 86A of the U.P. GST Rules, without recording specific written “reasons to believe” linking the assessee to fraudulent transactions, is without jurisdiction and therefore illegal. The Court stressed that mere reliance on ex-parte communications or general alerts from DGGI does not satisfy the statutory requirement.
The present judgment thus consolidates the dominant judicial view favouring strict interpretation and rejecting negative blocking.
Relevant Provisions:
Rule 86A of the CGST Rules, 2017:
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-
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
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.”
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