Blocking of ITC Without Pre-decisional Hearing Quashed by Karnataka High Court

Case Title: M/s. Safan Fasteners v. Assistant Commissioner & Ors.
Court: High Court of Karnataka
Petition No.: WP No. 9359 of 2025 (T-RES)
Category of Dispute: Input Tax Credit
Date of Judgment: 08 April 2025
Relevant Sections: Rule 86A of the CGST Rules, 2017; Article 14, Article 226 of the Constitution
Bench: Hon’ble Mr. Justice S.R. Krishna Kumar

Facts of the Case

[Para 1–3]
The petitioner, M/s. Safan Fasteners, challenged the blocking of Input Tax Credit (ITC) amounting to ₹3,13,07,146 from its Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules, 2017. The action was taken without granting a pre-decisional hearing and based solely on a communication received from another officer in Goa about non-existence of suppliers.

Question(s) in Consideration

[Para 5, 6, 9]

1. Whether the blocking of ECL under Rule 86A without pre-decisional hearing violated principles of natural justice?

2. Whether the impugned order was valid, given it was based on “borrowed satisfaction” and lacked independent reasons to believe fraudulent ITC availment?

Observations of the Court

[Para 5, 8, 9]

• Rule 86A, though silent, must be read with the principles of natural justice. Blocking ECL entails civil consequences and necessitates pre-decisional hearing unless exceptional urgency is proven.

• Cited K-9 Enterprises v. State of Karnataka (WA No.100425/2023) where it was held that blocking ECL without hearing violates Article 14.

• Relied on CBIC Circular dated 02.11.2021, emphasizing objective satisfaction and proper material before invoking Rule 86A.

• Held that respondents acted mechanically without application of mind or independent inquiry. Blocking was based on mere field visit report from Goa officers, thus constituting “borrowed satisfaction” (Para 9.1–9.8).

• Highlighted importance of proportionality and preconditions under Rule 86A not being fulfilled (Para 9.9–9.11).

Judgment of the Court

[Para 6–7]

• Allowed the writ petition.

• Quashed the impugned order dated 13.01.2025 blocking the petitioner’s Electronic Credit Ledger.

• Directed authorities to immediately unblock the ledger to enable return filing.

• Granted liberty to the department to issue fresh notice and proceed in accordance with law.

• Clarified that non-appearance by petitioner on 21.04.2025 would result in automatic revival of the present petition.

Between Fine Lines

• ITC is a statutory right, and blocking it without prior notice or proper justification amounts to violation of due process.

• Rule 86A must be exercised with caution and cannot rest on assumptions or instructions from other officers.

• Borrowed satisfaction cannot replace independent formation of opinion by the competent authority.

• Civil consequences like blocking of ECL warrant adherence to natural justice even in absence of express legal provision.

• A pre-decisional hearing is not just formality—it’s a substantive right especially in tax matters affecting working capital.

Summary of Referred Cases

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