Bombay High Court: ITC Restriction Under Rule 86A of CGST Rules Automatically Expires After One Year

Overview of the Judgment

The Bombay High Court has delivered a significant ruling in the matter of NZS Traders Pvt. Ltd. v. Union of India & Ors., clarifying that the blocking of an electronic credit ledger under Rule 86A of the CGST Rules, 2017 is time-bound and cannot be allowed to persist indefinitely. The Court firmly established that once the statutory period of one year elapses from the date on which the restriction was originally imposed, the blocking ceases automatically — by operation of law — without requiring any separate order or directive from the authorities.

This ruling carries substantial implications for GST-registered businesses whose Input Tax Credit accounts have been blocked, particularly in cases where the one-year window has lapsed but authorities have not proactively lifted the restriction.

Background and Facts of the Case

NZS Traders Pvt. Ltd. (hereinafter referred to as "the Petitioner") is a registered entity that had lawfully availed Input Tax Credit (ITC) in the course of its business operations. The Revenue Department — Union of India & Ors. (hereinafter referred to as "the Respondent") — proceeded to block the Petitioner's electronic credit ledger on February 16, 2024, restricting access to ITC amounting to ₹4,25,75,682/-.

What made this action particularly contentious was how it was carried out:

  • No prior notice was issued to the Petitioner before imposing the restriction
  • No show cause notice was served
  • No personal hearing was granted
  • No specific written order was communicated to the Petitioner

The Petitioner maintained that the ITC in question had been correctly and legitimately availed in accordance with the provisions of the CGST Act, 2017. Despite the passage of more than one year from the date of blocking — which is the maximum permissible duration under Rule 86A(3) of the CGST Rules, 2017 — the Respondent made no move to lift the restriction.

Faced with a continued freeze on a significant portion of its credit, the Petitioner was compelled to approach the Bombay High Court by way of a writ petition, seeking both the unblocking of its ITC and the quashing of the impugned blocking action.

The Respondent's Defence

The Revenue Department sought to justify the continuation of the restriction on two principal grounds:

  1. The Petitioner's GST registration had already been cancelled by the department
  2. Any unblocking of credit would remain subject to further departmental proceedings, including the issuance of a show cause notice

The department's position was, in essence, that the existence of pending proceedings or the cancellation of registration constituted sufficient grounds to maintain the block beyond the one-year period prescribed under the Rules.

Whether the restriction imposed on an electronic credit ledger under Rule 86A of the CGST Rules, 2017 can lawfully continue beyond a period of one year from the date on which it was first imposed?

Court's Analysis and Decision

The Bombay High Court, in Writ Petition No. 4815 OF 2024, ruled decisively in favour of the Petitioner. The key observations and holdings of the Court are detailed below.

One-Year Limit Is Absolute and Unconditional

The Court examined Rule 86A(3) of the CGST Rules, 2017, which provides in unambiguous terms that:

"Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction."