Restriction on input tax credit under Rule 86A automatically ceases after one year.

The petitioner, a registered trader in iron and steel products, claimed to have regularly filed GST returns and paid the GST collected on its supplies. Following summons issued under Section 70(1) of the applicable GST Acts, the petitioner was treated by the authorities as a non-existent dealer and “bill trader.”

The petitioner’s Input Tax Credit (ITC) in its electronic credit ledger was blocked on 27 January 2023 under Rule 86A of the Tamil Nadu Goods and Services Tax Rules, 2017. Subsequently, the third respondent issued communications dated 11 May 2023 and 13 September 2023 directing action against the ITC of beneficiaries of the petitioner’s alleged bill-trading activity.

The petitioner initially challenged the proceedings on several grounds but ultimately confined its challenge to the continuation of the ITC blockage beyond one year. It contended that Rule 86A(3) required the restriction to cease automatically after one year from the date of its imposition.

At the time of judgment, the blockage had continued for more than two and a half years.

Whether the restriction on debit of ITC imposed under Rule 86A of the TNGST Rules could continue beyond one year from the date on which the restriction was imposed.

Whether the respondents could continue the blockage merely on the basis of internal communications, without completing assessment and initiating regular recovery proceedings in accordance with law.

The Court applied Rule 86A(1) and, principally, Rule 86A(3) of the TNGST Rules, 2017, under which the competent authority may restrict utilisation or debit of ITC where the statutory conditions are satisfied, but the restriction “shall cease to have effect” upon expiry of one year from the date of its imposition.

The Court held that this one-year limit operates automatically and prevents indefinite continuation of the blockage.

It further recognised that ordinary recovery proceedings may be undertaken under Section 79 of the GST Act after completion of assessment, and that an internal communication by itself cannot justify invocation or continuation of the Rule 86A restriction unless the statutory requirements are satisfied.

The Court found that the petitioner’s ITC had been blocked on 27 January 2023 and that the restriction continued beyond the one-year period prescribed by Rule 86A(3).

The later communications dated 11 May 2023 and 13 September 2023 could not extend or revive the statutory period, because the period runs from the original date on which the restriction was imposed.

The Court emphasised that Rule 86A(3) uses mandatory language and that the restriction must automatically cease after one year; indefinite blockage of ITC would have serious civil consequences.

The Court also noted that the respondents’ remedy, if liability was established, was to complete assessment and pursue recovery under Section 79 rather than continue the provisional Rule 86A blockage.

The writ petition was disposed of with a direction to the fourth respondent to forthwith unblock the ITC lying in the petitioner’s electronic credit ledger.

The respondents were left at liberty to complete any pending assessment proceedings and initiate recovery proceedings in accordance with law, if necessary. No costs were awarded, and the connected miscellaneous petitions were closed.