Electronic Credit Ledger can be blocked even if fraudulently availed ITC has been used up: Madras High Court

The Madras High Court recently held that Electronic Credit Ledgers (ECL) of firms suspected to have wrongfully availed input tax credit (ITC) can be blocked even if the fraudulently availed ITC has already been used by the time the blocking order is passed. .Justice Krishnan Ramasamy held that the authorities under the Goods and Services Tax (GST) regime are empowered under Rule 86A of the GST Rules of 2017 to block the ECL of such firms to the extent of the fraudulently availed ITC amount, even the remaining credit in the ECL is zero at the time of passing the blocking order.“The State authorities are empowered to pass blocking orders to the extent of credit which was fraudulently availed and available in ECL for discharge of output tax liabilities either at the time of blocking or subsequently, in the event the same was already utilised,” the High Court said in its November 28 ruling..The Court reasoned that it would be impractical to always expect credit to remain in the ECL by the time the authorities detect ITC fraud. "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, the Rule 86A was incorporated," the Court said. .The Court was hearing a petition filed by Chennai-based company Skanthaguru Innovations against a 'GST ASMT 10' notice issued on September 26 this year by the Commercial Tax Officer at Chennai, notifying it of the blocking of its ECL.The ECL is a digital account maintained on the GST portal for each registered taxpayer. It reflects the ITC (tax paid on the purchase of raw materials or inputs used for a business) available to the taxpayer which can be used to set off output GST liabilities (tax paid on sale of final goods or services).Blocking of ECLs can have serious implications for a business's financial operations and GST compliance. It is usually done due when irregularities are detected, or when there is a suspicion of fraud or failure to comply with GST regulations..The firm before the Madras High Court challenged the blocking of its ECL on various grounds, including that their ledger had nil balance when the blocking order was passed. It cited a February 2022 order of the Gujarat High Court to argue that GST credit cannot be blocked in the ECL if the balance is nil or insufficient.Senior Advocate Sathish Parasaran, who appeared for the petitioner firm, argued that the blocking of the ECL without there being any credit to avail, was in breach of Rule 86A of the 2017 GST rules and that it was also contrary to the Gujarat High Court judgement.Rule 86A empowers the commissioner of GST to block ECL on the basis of reasonable belief that credit of input tax has been fraudulently availed or is ineligible.Parasaran also drew the Court's attention to a Delhi High Court ruling which said that availability of credit balance in the ECL is a precondition to invoke Rule 86A for the blocking of ECL..The Madras High Court, however, found that both the Gujarat and Delhi High Courts had not considered Rule 86A in its entirety.Justice Ramasamy opined that if the provision is read as a whole, it would show that ECL can be blocked to the extent of the fraudulently availed ITC, even if the credit balance is zero when the blocking order is passed. “The 2nd part of Rule 86A empowers the Authorities not to allow the debit of amount equivalent to the fraudulently availed credit for discharge of liabilities under Section 49. If it was already utilised, the officials are also empowered to pass blocking orders to the extent of amount equivalent to 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 High Court highlighted..The Court further observed that Rule 86A did not prohibit negative blocking of ECLs."At no stretch of imagination, one could construed that no blocking orders can be passed at the time of zero balance of ITC in the ECL. Since the negative blocking can continue up to the stage of accumulation of ITC to the extent of wrongful availment of credit in the ECL, the blocking orders can be issued even at the time of zero balance of ITC in the ECL," the Court said. .The Court also rejected the firm's argument that it was being prosecuted simultaneously by both the State and the Central authorities in the matter. Parasaran had told the Court that the Central GST authorities had initiated proceedings against the company following allegations of it having fraudulently availed ITC of around ₹6.8 crore for the period up to March 2024. Simultaneously, the State GST authorities claimed to have discovered wrongful procuring of ITC totalling ₹13.10 crore for the period up to September 2024 and initiated simultaneous proceedings, Parasaran said.The High Court however, found that the Central and State authorities had initiated proceedings with respect to different time periods, even if the allegations of fraud were similar.It proceeded to dismiss the firm's petition and allowed GST proceedings initiated by the State-level authorities to continue. .Advocate Karthik Sundaram also appeared for the petitioner-firm. Additional Government Pleader Harsha Raj and standing counsel RP Pragadish represented the GST authorities in Chennai. .[Read Order]