Rule 86A CGST | Blocked ITC Ineligible for Section 107(6) Pre-Deposit to File GST Appeal : Delhi HC

The Delhi High Court has ruled that input tax credit blocked under Rule 86A of the CGST Rules cannot be treated as payment towards the mandatory pre-deposit required under Section 107(6) of the CGST Act for filing a statutory appeal. The Court clarified that a restriction under Rule 86A merely prevents debit of the specified amount from the Electronic Credit Ledger and does not amount to appropriation or payment towards an adjudicated demand. The petitioner is permitted to file its appeal within four weeks from the judgment date without being rejected on limitation grounds, subject to compliance with the pre-deposit requirement using lawfully available and debitable credit.

Background & Facts

The Dispute

The petitioner, Spherion Solutions Private Limited, a company registered under the CGST Act in the State of Haryana, challenged a summary order in FORM GST DRC-07 dated 09.12.2025 issued pursuant to an Order-in-Original (OIO) dated 25.11.2025. The petitioner sought rectification of the erroneous DRC-07 and a direction to appropriate ₹3,33,257/- out of the input tax credit blocked in its Electronic Credit Ledger (ECL) towards the mandatory pre-deposit under Section 107(6) of the CGST Act to enable filing of a statutory appeal against the OIO.

Key Facts

• 22.11.2024: Directorate General of GST Intelligence (DGGI), Gurugram Zonal Unit (Respondent No.2) blocked input tax credit aggregating ₹33,32,568/- in the petitioner's ECL under Rule 86A of the CGST Rules during investigation into an alleged network of entities connected with M/s N.K. Logistics Private Ltd. M/s Crimson International Private Ltd. was alleged to be a non-genuine entity issuing invoices without corresponding supply.
• 27.06.2025: DGGI issued a Show Cause Notice (SCN) alleging wrongful availment of ITC of ₹33,32,568/- by the petitioner without receiving corresponding goods or services.
• 25.11.2025: Adjudicating Authority (Respondent No.1) passed the OIO confirming IGST demand of ₹10,40,472/- for FY 2020-21 and ₹22,92,096/- for FY 2021-22 (aggregate ₹33,32,568/-) with interest and equivalent penalty.
• 09.12.2025: Summary of OIO uploaded in FORM GST DRC-07 with error: reflected aggregate ₹66,65,136/- under "penalty" head instead of separately showing tax demand and penalty; incorrectly referred to FY 2018-19.
• 24.02.2026: Petitioner attempted to file appeal on GST portal; portal computed pre-deposit at ₹6,66,514/- (10% of erroneous ₹66,65,136/-) instead of correct ₹3,33,257/- (10% of ₹33,32,568/-).
• 24.02.2026 & 25.02.2026: Petitioner attempted rectification application but faced technical error on portal.
• 25.02.2026: Grievance lodged with GSTN (Respondent No.3); closed on 02.03.2026 for alleged non-receipt of information.
• 01.12.2025: Restriction imposed by DGGI on 22.11.2024 automatically removed by system after one year under Rule 86A(3).
• 03.10.2025: Excise and Taxation Officer, State of Haryana blocked ₹64,386/- under Rule 86A.
• 02.01.2026: Same officer blocked further ₹17,31,702/- under Rule 86A. Subsisting restrictions aggregate ₹17,96,088/-.
• 16.03.2026: Respondent No.1 rectified FORM GST DRC-07 under Section 161 CGST Act, separately reflecting tax demand of ₹33,32,568/- and equivalent penalty.

Procedural History

• 24.02.2026: Attempted appeal filing on GST portal thwarted by erroneous DRC-07.
• 25.02.2026: Rectification attempts and GSTN grievance.
• 16.03.2026: Respondent No.1 rectified DRC-07 under Section 161 CGST Act.
• 23.03.2026: High Court recorded petitioner's contention; directed GSTN to clarify and respondents to respond on blocked credit.
• 03.09.2026: Judgment pronounced by Division Bench (Justice Anil Kshetarpal and Justice Shail Jain).

Relief Sought

The petitioner sought: (1) rectification of FORM GST DRC-07 dated 09.12.2025; (2) direction to appropriate ₹3,33,257/- out of blocked ITC towards mandatory pre-deposit under Section 107(6) CGST Act; (3) permission to file appeal manually with exclusion of period from 24.02.2026 until disposal for limitation computation.

The Legal Issue

The central question was whether input tax credit whose utilisation stands restricted under Rule 86A of the CGST Rules can be appropriated towards the mandatory pre-deposit of 10% of the disputed tax demand under Section 107(6) of the CGST Act for filing a statutory appeal against an Order-in-Original.

Arguments Presented

For the Petitioner

Learned counsel submitted that although the DRC-07 error was rectified, the petitioner continues to face technical difficulties in filing the appeal. The petitioner prayed for permission to file the appeal manually and for exclusion of the period from 24.02.2026 until disposal for limitation purposes. It was contended that ITC of ₹17,96,088/- is already blocked in the ECL, exceeding the pre-deposit requirement of ₹3,33,257/-. Requiring further cash payment would impose a double burden. Reliance was placed on Section 49(4) of the CGST Act, Rule 86(2) of the CGST Rules, Circular No.172/04/2022-GST dated 06.07.2022, and the decisions in Oasis Realty v. Union of India (2022 SCC OnLine Bom 11891) and Yasho Industries Limited v. Union of India (2024 SCC OnLine Guj 4390) to argue that pre-deposit under Section 107(6) may be made by utilising amounts available in the ECL. The successive restrictions under Rule 86A were challenged: the 22.11.2024 restriction ceased on expiry of one year, yet further restrictions were imposed on 03.10.2025 and 02.01.2026, including after the OIO. The petitioner's bank account was also provisionally attached, leaving insufficient liquidity for cash pre-deposit.

For the Respondents

Learned counsel submitted that the principal error in DRC-07 was rectified on 16.03.2026. Subsequent filing difficulty was attributed to incorrect entry of IGST particulars by the petitioner, referred to GSTN for examination. It was not disputed that credit ordinarily available in ECL may be utilised towards pre-deposit under Section 107(6). However, the present case concerns credit whose availment was held inadmissible in the OIO and whose utilisation stands restricted under Rule 86A. A Rule 86A restriction is preventive, not amounting to recovery or appropriation towards adjudicated demand; mere blocking cannot satisfy the statutory pre-deposit requirement. The decisions in Oasis Realty and Yasho Industries were distinguished as concerning credit available for utilisation, not credit blocked under Rule 86A. Reliance was placed on Jyoti Construction v. Deputy Commissioner of CT & GST (2021 SCC OnLine Ori 1511) and KOG-KTV Food Products (India) Private Limited v. Joint Commissioner (Appeals) (W.P.(MD) No.21581 of 2022, Madras HC, decided 17.04.2024). Admissibility of ITC depends on examination of underlying transactions and evidence, which ought to be considered by the Appellate Authority, not in writ jurisdiction.

The Court's Analysis

The Court first noted that rectification of FORM GST DRC-07 on 16.03.2026 rendered the first relief infructuous. The surviving issue was whether ₹3,33,257/- out of ITC blocked under Rule 86A could be appropriated towards the Section 107(6) pre-deposit.

The Court examined Section 107(6) of the CGST Act, which requires payment of: (a) admitted tax, interest, fine, fee and penalty in full; and (b) a sum equal to 10% of the remaining disputed tax, subject to a maximum of ₹20 crore. Section 49(4) permits utilisation of amounts available in the ECL for payment of output tax, subject to prescribed conditions and restrictions. Rule 86A(1) authorises the competent officer, upon recording reasons to believe that ITC has been fraudulently availed or is ineligible, to restrict its utilisation by not allowing debit of an equivalent amount from the ECL for discharge of any liability under Section 49 or for refund claims. Rule 86A(3) provides that such restriction ceases after one year from imposition.

A conjoint reading showed that Section 107(6) requires actual payment, while Section 49(4) permits utilisation of credit available in the ECL subject to CGST Rules restrictions. Where a Rule 86A restriction operates, the corresponding amount cannot be debited unless the restriction is removed or modified by the competent authority.

The Court accepted the respondents' distinction of Oasis Realty and Yasho Industries: those cases concerned credit available for utilisation, not credit restricted under Rule 86A. The Court held:

"The mere blocking of input tax credit does not amount to its payment or appropriation towards an adjudicated demand. A restriction under Rule 86A only prevents debit of the specified amount from the ECL. Unless the amount is actually debited or appropriated towards the liability, the requirement of pre-deposit cannot be treated as satisfied merely because the credit has been placed beyond the use of the registered person."

The OIO itself drew a clear distinction between appropriation and mere confirmation of demand. While dealing with Crimson International, the Adjudicating Authority appropriated ITC available in its credit ledger against the confirmed demand. However, no corresponding direction for appropriation of the petitioner's ECL credit was passed in the OIO.

Two further aspects prevented granting relief: (1) The subsisting restrictions dated 03.10.2025 and 02.01.2026 were imposed by the Jurisdictional Officer (Excise and Taxation Officer, Haryana), who was not impleaded. None of the existing respondents exercised control over these restrictions. A direction to appropriate blocked credit would require modification of restrictions imposed by an authority not before the Court. (2) The orders imposing these restrictions were not placed on record; the material considered and reasons recorded under Rule 86A were unavailable for examination. The Blocked Credit Ledger descriptions cannot substitute the statutorily required reasons. The satisfaction contemplated under Rule 86A is that of the officer imposing the restriction, and reasons must emerge from that officer's record, not be supplied subsequently by another authority.

Additionally, the Blocked Credit Ledger did not reflect the running balance in the ECL, merely recording blocked/unblocked amounts on different dates. It did not establish that ₹17,96,088/- or any specified part would be available for debit but for the restrictions.

The Verdict

The petitioner succeeded in part. The Court disposed of the writ petition with the following directions: (1) The rectification prayer is infructuous; Respondent No.1 shall furnish a copy of the corrected FORM GST DRC-07 within one week. (2) The prayer for appropriation of ₹3,33,257/- out of blocked ITC under Rule 86A is declined; petitioner is at liberty to seek removal/modification of restrictions dated 03.10.2025 and 02.01.2026 from the competent authority or challenge them in appropriate proceedings. (3) The petitioner is permitted to file its appeal under Section 107 CGST Act against the OIO within four weeks from the date of judgment (03.09.2026); if filed within this period, it shall not be rejected on limitation grounds and shall be considered on merits, subject to compliance with Section 107(6). (4) The petitioner shall not be required to make the pre-deposit exclusively through the Electronic Cash Ledger; it may utilise any amount otherwise lawfully available and capable of being debited from its ECL, but credit blocked under Rule 86A shall not be treated as pre-deposit payment unless the restriction is removed/modified by the competent authority. (5) Respondent Nos.1 and 3 shall render necessary assistance for electronic filing; if the portal prevents filing despite correct completion of FORM GST APL-01 and Section 107(6) compliance, manual submission before the competent Appellate Authority is permitted. (6) No coercive steps for recovery of the OIO demand shall be taken for four weeks from the date of judgment; if appeal is filed within this period after Section 107(6) compliance, Section 107(7) consequences follow; otherwise protection ceases automatically. All rights and contentions on merits of OIO and validity of Rule 86A restrictions are left open.

What This Means For Similar Cases

Blocked Credit Is Not Payment

A restriction under Rule 86A is preventive and does not constitute appropriation or payment towards an adjudicated demand. Practitioners must distinguish between credit "available" in the ECL (which can be utilised for pre-deposit under Section 107(6) per Oasis Realty and Yasho Industries) and credit "blocked" under Rule 86A (which cannot). The statutory pre-deposit requirement under Section 107(6) mandates actual payment or debit, not mere existence of a blocked balance exceeding the pre-deposit amount.

• Actionable takeaway: When advising clients on GST appeals, verify whether ITC is freely available in the ECL or subject to Rule 86A restrictions. Only the former can be utilised for pre-deposit.
• Actionable takeaway: If credit is blocked, the proper remedy is to seek removal/modification of the restriction from the competent authority or challenge the restriction order in appropriate proceedings before relying on it for pre-deposit.

Procedural Fairness in Appeal Filing

The Court protected the petitioner's statutory appellate remedy against technical portal errors attributable to the adjudicating authority. The four-week window from judgment date to file the appeal without limitation rejection, coupled with the option of manual filing if portal issues persist, establishes a precedent for safeguarding access to appellate remedies.

• Actionable takeaway: Where GST portal errors (especially erroneous DRC-07) prevent timely appeal filing, document all attempts (screenshots, grievance numbers, timestamps) and seek judicial intervention for extension of limitation and manual filing permission.
• Actionable takeaway: The Court's direction that respondents assist in electronic filing and accept manual filing if portal fails creates an enforceable obligation on GSTN and departmental officers.

Necessary Party Requirement for Challenging Rule 86A Restrictions

The Court refused to direct appropriation of credit blocked by an authority (Haryana Excise and Taxation Officer) not impleaded in the writ petition. This underscores that challenges to Rule 86A restrictions must name the officer who imposed the restriction and the competent authority controlling it.

• Actionable takeaway: In writ petitions seeking relief against Rule 86A restrictions, ensure the officer who passed the restriction order and the jurisdictional Commissioner are impleaded as respondents.
• Actionable takeaway: Obtain and place on record the actual restriction orders with reasons recorded, as the Blocked Credit Ledger entries alone are insufficient for judicial review of the restriction's validity.