Madras High Court rules input tax credit freeze cannot exceed one year

The Madras High Court has declared that the temporary freeze on input tax credit under Rule 86A of the GST Rules is limited to one year, ordering the unblocking of credits held for over two and a half years and reaffirming time-bound restrictions for tax assessments.

The Madras High Court has ruled that a temporary block on input tax credit under Rule 86A of the GST Rules cannot be allowed to run on indefinitely, holding that such a restriction loses effect after one year. The court ordered tax officials to restore access to the credit of Metal Trade Incorporation, which had remained frozen for more than two-and-a-half years, according to reports of the judgment.

Justice S. Raveekumar said the freeze had been imposed on 27 January 2023 and could not lawfully continue after the one-year limit built into Rule 86A(3). The judge rejected the department’s argument that a later communication could justify the continuing restriction, and said the wording of the rule makes clear that the power is time-bound.

The case arose after State tax authorities issued summons to Metal Trade Incorporation in October 2022 and later alleged that the firm was a non-existent dealer and bill trader. On that basis, officials had blocked the input tax credit of entities said to have dealt with it. Metal Trade Incorporation challenged the continuing blockage in court, focusing on the fact that the restraint had outlived the statutory period.

The court said prolonged denial of access to input tax credit can have serious civil consequences and should not be used as a substitute for completing the underlying assessment. It noted that if the tax department believes money is due after assessment, the GST law already provides recovery routes under Section 79. The bench therefore directed officials to unblock the credit in the company’s electronic credit ledger while allowing the department to continue assessment and recovery proceedings in accordance with law.