ITC ledger blocking under Rule 86A quashed for lack of hearing and borrowed satisfaction without independent reasons

Case Title: M/s Ittefaq Steels and Scrap Traders v. Additional Chief Secretary, Finance Department & Assistant Commissioner of Commercial Taxes (Audit)-6, Mysore
Court: High Court of Karnataka, Bengaluru
Petition No.: Writ Petition No. 12137 of 2025 (T-RES)
Category: Input Tax Credit – Rule 86A blocking of Electronic Credit Ledger
Date of Judgment: 24 April 2025
Relevant Provisions: Rule 86A of CGST/KGST Rules, 2017; Articles 19(1)(g) and 300A of the Constitution of India

Facts (Paras 1–3)

The petitioner, M/s Ittefaq Steels and Scrap Traders, a proprietary concern from Mysore, challenged the order dated 03.09.2024 issued by the Assistant Commissioner of Commercial Taxes (Audit-6), Mysore, which had blocked its Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules, 2017. The petitioner contended that the order was passed without granting any pre-decisional hearing and without recording any independent “reasons to believe.” The blocking was based solely on enforcement reports alleging non-existence of the supplier’s place of business, which the petitioner claimed amounted to “borrowed satisfaction.”

Questions for Determination (Para 3)

1. Whether the blocking of the Electronic Credit Ledger under Rule 86A without giving a pre-decisional hearing violates principles of natural justice?

2. Whether the impugned order reflected independent formation of opinion or merely relied on borrowed satisfaction from enforcement authorities?

Court’s Observations (Paras 5–6)

The Court referred extensively to the Division Bench ruling in K-9 Enterprises v. State of Karnataka (W.A. No. 100425/2023) which held that:

• Two pre-conditions must be fulfilled before invoking Rule 86A:
  (a) tangible material to justify the action, and
  (b) recording of “reasons to believe” in writing.

• Blocking of credit is draconian in nature, requiring utmost care, caution, and independent inquiry.

• “Borrowed satisfaction” from another officer’s investigation cannot justify ECL blocking.

Relying on these principles, the Court held that the impugned order did not record any independent satisfaction and was passed mechanically without due reasoning. The authority merely stated that the petitioner was “non-existent,” without verifying facts or granting an opportunity of hearing. Such an order violated procedural fairness and was contrary to Rule 86A and CBIC Circular dated 02.11.2021 which requires careful application of mind and objective material before exercising power.

Judgment (Paras 6–7)

The Court allowed the writ petition, holding that:

• The order dated 03.09.2024 blocking the ECL was arbitrary and illegal, being based on borrowed satisfaction and absence of reasons to believe.

• The respondents were directed to unblock the petitioner’s ECL immediately to enable return filing.

• Liberty was granted to the department to issue a fresh notice in accordance with law and the K-9 Enterprises judgment, provided a fair hearing is given.

• The petitioner must appear before the officer on 05.05.2025; failure to do so would automatically recall the relief.

Between Fine Lines

This ruling reinforces that blocking of ITC under Rule 86A is not a routine administrative action. Officers must independently form “reasons to believe” supported by evidence and must issue a reasoned, speaking order. Any action based merely on reports or borrowed satisfaction violates natural justice. For taxpayers, it underlines that ECL blockage can be challenged successfully where the authority fails to follow due process or apply its own mind.

Summary of Cases Referred

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