Tax Vista Edn. 257 - 13th October 2025 Kasi Viswanathan V

 

 

A. Litigation:

Courts split on Negative blocking of ITC:

The Petitioner challenged the order dated 09.12.2024 blocking Input Tax Credit (ITC) of Rs.12,84,273/-, as the balance in the Electronic Credit Ledger (ECL) on that date was nil, before the Hon'ble Bombay High Court. The Hon'ble Bombay HC took note of the conflicting decisions and held that a literal interpretation of Rule 86A is to be adopted. In the absence of any ambiguity, there is no occasion to infer or presume any legislative intent or object beyond the plain language of the provision. The Court accordingly held that, on a plain reading, the credit must be available in the Electronic Credit Ledger (ECL) on the date of invoking Rule 86A.

 

There are divergent judicial views on interpretation of when "available" in ECL has to be determined i.e. whether at the time of invoking Rule 86A or made available in ECL at any point of time before utilization. While the issue seemingly appears as a debate between literal and purposive interpretation, the matter currently before the Courts is essentially the divergence of views even within the literal interpretation of Rule 86A.

 

There are following two parts to Rule 86A as per Hon'ble Madras High Court in the case of 2024-VIL-1296-MAD:

 

First part: "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"

 

Second part: "may, for the reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of liabilities under Section 49"

 

As per the Allahabad High Court in the case of R M Diary products LLP 2021-VIL-553-ALH and the Calcutta High Court in the case of N.M.D. Engineering Works/Basanta Kumar Shaw 2022-VIL-529-CAL, it was held that the expression 'has been' employed in the first part indicates that 'available' relates back in time to when the assessee allegedly availed input tax credit, either fraudulently or ineligible to avail.

 

While the Hon'ble Madras High Court observed that, from the highlighted second part, Rule 86A would permit blocking not only the fraudulently availed ITC currently available in the ECL, but also an amount equivalent to such credit utilized for discharge of liabilities under Section 49.

 

While the second part makes it clear that it refers not to the same credit but only an amount equivalent thereto, it does not specify whether such equivalent amount must be present at the time of invocation or may accrue in the future. This is the real bone of contention in matters involving negative blocking. Accordingly, the question remains unresolved, and the final word will await the Supreme Court's ruling.

 

For sake of completeness, the Delhi and Telangana High Courts have held that Rule 86A cannot block credit that is not available at the time of invocation, based on the expression "available." The Hon'ble Supreme Court in 2025-VIL-82-SC declined to interfere with the Delhi High Court's decision, leaving the Revenue free to pursue other remedies for recovery in accordance with law.

 

Another important decision on Rule 86A is by the Division Bench of Karnataka High Court in K-9 Enterprises in 2024-VIL-994-KAR which addressed whether a pre-decisional hearing is required. [2025-VIL-1048-BOM]

 

Recovery of tax demand from ECL held valid:

The Petitioner challenged the recovery of Rs.2,87,914/- from his Electronic Credit Ledger (ECL) by the proper officer on 19.06.2025 towards the demand of Rs.10,32,672/- arising under the assessment (adjudication) order dated 25.02.2025, before the Hon'ble Chhattisgarh High Court. The petitioner's rectification application against the said order was rejected on 06.08.2025 and an appeal was thereafter filed on 14.08.2025. The order dated 25.02.2025 had granted 30 days' time for payment of the outstanding demand. The Hon'ble High Court upheld the recovery, holding that since no stay order was passed after filing the rectification application (which was ultimately rejected), the recovery effected from the electronic credit ledger was valid under Section 79(1)(a) of the CGST Act, 2017.

 

In few cases, SGST orders carry an instruction that tax is to be paid within 30 days, a practice continued from the erstwhile VAT/Sales Tax regime. Under Section 78 of CGST Act, recovery proceedings can be initiated only upon failure to pay the dues within three months from the date of service of the order. In the present case, though the exact date of communication of the order dated 25.02.2025 is not available, the recovery initiated on 19.06.2025 was certainly after the expiry of 30 days and possibly beyond three months from the date of service of the order. Consequently, the aspect relating to the three-month period under Section 78 did not come up for consideration before the Hon'ble Court. Further, in terms of Section 107(7), upon filing of appeal and payment of the 10% pre-deposit, the recovery for the balance amount is deemed to be stayed. Since in the instant case, the appeal was filed only on 14.08.2025, the benefit of such deemed stay was not available on the date of recovery.

 

Where adjudication orders stipulate payment within 30 days, it remains unclear whether such direction is issued in exercise of powers under the proviso to Section 78 for early recovery. To avoid ambiguity, taxpayers may communicate that the law permits three months and that an appeal is being filed within this period, thereby precluding any premature recovery action. It would also be beneficial if the State issues suitable administrative instructions to exercise powers under proviso to Section 78 separately and not as part of adjudication order itself. [2025-VIL-1049-CHG]

 

HC finds no fault in last-minute measures

The Petitioner claimed transitional credit at the last moment (i.e. 19.56 hours on 30.11.2022) of the extended window permitted pursuant to directions of the Hon'ble Apex Court in FILCO Trade Centre. The application could not be uploaded due to errors displayed on the portal and a grievance ticket was filed on 01.12.2022. The errors were found to be attributable to the Petitioner due to data being entered in the wrong column.

 

The Hon'ble High Court held that a registered person remains eligible to submit the application upto the last moment of the time limit fixed. While the Department counsel highlighted the difficulties in portal to allow the credit at the point in time, the High Court referred to the Supreme Court decision in Aberdare (2025-VIL-15-SC), which held that software limitations cannot justify denial of credit, as software is intended to facilitate compliance and can be configured to do so.

 

Importantly, this decision differs from others that primarily dealt with technical glitches. Its significance lies in upholding the principle that taking action to stake a claim within the prescribed period safeguards the right to that claim. Notably, even an item from 2017, for which the Supreme Court granted an extension in 2022, and which was acted upon at the very last moment of the extended period, was held to be permissible [2025-VIL-1032-KER].

 

B. Foreign Trade Section

1. Non-applicability of EDF/SOFTEX form for SEZ/DTA to SEZ: Instruction No. 120 dated 07.10.2025 clarifies that (a) transactions between SEZ Units and (b) the transactions from DTA to SEZ Unit for export of services are not subject to FEMA regulations, and consequently, no declaration is required in EDF or SOFTEX.

 

C. GSTN Update

GSTN update dated 08.10.2025 clarifies:

a. No change in auto-population of ITC due to implementation of IMS.

b. GSTR-2B will be auto generated on 14th. Actions can be taken in IMS and GSTR-2B can be re-generated till filing of GSTR-3B.

c. Following changes are effective from October GSTR-3B returns:

 

i. Credit notes are permitted to be kept 'pending' for one reporting period

ii. Option enabled for mentioning separate values for credit note accepted to ensure that ITC reversal is in line with ITC claimed.

 

CESTAT: Mandatory e-filing of appeals

CESTAT through notification dated 01.10.2025 introduces mandatory e-filing of appeals from 15.11.2025. The physical filing of appeal will be discontinued from 31.12.2025. The notification also requires uploading documents earlier filed for all pending appeals at the earliest but not later than one week before the hearing.

 

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)