Shyam Sunder Strips Vs Union of India And Others (Punjab and Haryana high court)

The Punjab and Haryana High Court decided three connected writ petitions — M/s Shyam Sunder Strips v. Union of India and Others, M/s Shyam Trading Co. v. Union of India and Others, and M/s Kamaldeep Metalics Pvt. Ltd. v. Union of India and Others — concerning the blocking of Electronic Credit Ledgers (ECLs) under Rule 86-A of the Goods and Services Tax (GST) Rules, 2017. The key issue was whether the Commissioner or an authorized officer could block amounts in a taxpayer’s ECL exceeding the credit available at the time of such action.Each petitioner’s ECL showed a “negative balance” created by the tax authorities — ₹34,43,946 for Shyam Sunder Strips, ₹67,82,734 for Shyam Trading Co., and ₹16,49,020 for Kamaldeep Metalics Pvt. Ltd. — on the ground that the Input Tax Credit (ITC) had been availed fraudulently or was ineligible due to non-existent suppliers. Petitioners argued that such “negative blocking” was beyond the authority conferred by Rule 86-A and violated the statute, as it artificially created a debit exceeding the actual ITC available.Petitioners relied on judgments of the Gujarat High Court (Samay Alloys India Pvt. Ltd. v. State of Gujarat), Delhi High Court (Best Crop Science Pvt. Ltd., Kings Security Guard Services Pvt. Ltd., and Karuna Rajendra Ringshia), and the Supreme Court’s dismissal of the Department’s special leave petitions (SLP(C) Nos. 014493/2025 and 017723/2025), which upheld those rulings. These courts held that blocking of ITC beyond the balance available in the ECL was illegal.The respondents contended that Rule 86-A permitted blocking even if no credit existed in the ECL, as the purpose of the rule was to prevent misuse of ITC and safeguard revenue. They cited decisions from the Calcutta (Basanta Kumar Shaw), Allahabad (R.M. Dairy Products LLP), and Andhra Pradesh (Sugna Sponge and Power Pvt. Ltd.) High Courts, which upheld such powers. Respondents argued that the rule functioned as a temporary, preventive mechanism, subject to review within one year, and not as a recovery measure.After hearing both sides, the Punjab and Haryana High Court reviewed the relevant statutory provisions, including Sections 16, 17, 18, and 49 of the Central Goods and Services Tax (CGST) Act, 2017, and Rule 86-A of the GST Rules, 2017. The Court observed that ITC, once self-assessed and credited to the ECL, could be used by taxpayers for payment of output tax. Rule 86-A allowed authorities to restrict debit from the ECL if the available credit was believed to be fraudulently availed or ineligible. However, the Court emphasized that the rule’s application depended on the actual availability of credit in the ECL at the time of action.Relying on the reasoning of the Gujarat and Delhi High Courts, the Court reiterated that the existence of ITC in the ECL was a condition precedent for invoking Rule 86-A. The Gujarat High Court in Samay Alloys held that where no credit existed, or it had already been utilized, any blocking would be without jurisdiction. The Delhi High Court in Best Crop Science clarified that Rule 86-A is a temporary protective measure, not a recovery provision, and must be strictly construed since it restricts a taxpayer’s access to their assets.The Punjab and Haryana High Court found that the contrary view taken by the Calcutta, Allahabad, and Andhra Pradesh High Courts — which interpreted “available” credit more broadly — was not persuasive. The Court agreed with the reasoning of the Gujarat, Delhi, and Telangana High Courts, particularly since the Supreme Court had declined to interfere with the Delhi High Court’s decisions in Kings Security and Karuna Rajendra Ringshia. The Court held that the plain language of Rule 86-A did not authorize blocking of ITC beyond what existed in the ledger, and doing so would amount to permanent recovery, which is governed only by Sections 73 or 74 of the CGST Act.Consequently, the Court ruled that the blocking of petitioners’ ECLs to create negative balances exceeded the authority granted under Rule 86-A and was unsustainable. The impugned orders were therefore set aside to the extent that they disallowed debit beyond the ITC available at the time of blocking. However, the Court clarified that the tax authorities remained free to pursue recovery or other legal remedies in accordance with law.Accordingly, all three writ petitions were allowed, and the pending miscellaneous applications were disposed of.