Facts of the Case:

The Petitioner, M/s Metal Trade Incorporation, a trader in Iron and Steel Products duly registered under GST and regularly filing returns since 01.07.2017, was issued summons under Section 70(1) on 18.10.2022 pursuant to an intelligence inquiry. After an earlier writ (WP No. 3033 of 2023) directed the Petitioner to appear and respond to the authorities, statements were recorded, and on 03.02.2023 an intimation proposed a penalty demand spanning assessment years 2017-18 to 2022-23. On 11.05.2023, the third respondent (Joint Commissioner, Intelligence) issued a communication to the Joint Commissioners across Chennai zones branding the Petitioner a “non-existent dealer” and directing that Input Tax Credit availed by its beneficiaries be reversed under Rule 86A of the GST Rules.

Pursuant to this, the fourth respondent issued consequential proceedings dated 13.09.2023 to block the ITC of the Petitioner’s beneficiaries. Crucially, the Petitioner’s own ITC had already been blocked in its Credit Ledger as early as 27.01.2023 — before the impugned 11.05.2023 and 13.09.2023 communications — and this blockage had continued uninterrupted for over two and a half years by the time of hearing. The Petitioner confined its challenge to this continued blockage beyond the one-year period prescribed under Rule 86A(3) of the TNGST Rules, 2017, and sought a Writ of Certiorari to quash the impugned proceedings as arbitrary and without authority of law.

Issue:

Whether the blocking of Input Tax Credit under Rule 86A of the TNGST Rules, 2017 can continue beyond the statutorily mandated period of one year from the date of imposition of such restriction, merely because subsequent administrative communications were issued during that period.

Held That:

The Madras High Court allowed the writ petition and directed immediate unblocking of the Petitioner’s Input Tax Credit. The Court held that Rule 86A(3) unambiguously provides that any restriction imposed under Rule 86A(1) automatically ceases to have effect upon expiry of one year from the date of imposition, and this cessation is meant to operate on its own force, without requiring further action by either party. Since the blockage had been imposed on 27.01.2023 and more than two and a half years had elapsed, the restriction stood lapsed by operation of law, and the subsequent internal communication dated 13.09.2023 could not be used to sustain or continue it.

The Court observed that Rule 86A is a temporary, protective measure meant to safeguard revenue only until assessment proceedings are completed, and cannot be allowed to operate as an indefinite freeze with drastic civil consequences for the taxpayer; where recovery is warranted, the State must proceed under the regular mechanism of Section 79 after completing assessment, rather than perpetuating an ITC block through internal communications. The Court further noted that authorities routinely fail to lift such blockages even after the statutory period lapses, compelling taxpayers to approach the Court repeatedly, and cautioned that a mere internal communication, without a proper assessment, cannot by itself justify invoking Rule 86A.

Accordingly, the fourth respondent was directed to forthwith unblock the Petitioner’s Credit Ledger, while leaving it open to the Department to complete any pending assessment and initiate recovery proceedings in accordance with law. No costs were awarded.

Case Name: M/s Metal Trade Incorporation vs State Tax Officer dated 21.08.2026

Citation No. 2026 Taxo.online 2591