The Hon’ble Karnataka High Court in the case of S. A. Enterprises v. The Assistant Commissioner of Central Tax [W.P. No. 27868 of 2025, order dated October 17, 2025] held that blocking the Electronic Credit Ledger (“ECrL”) by a mere text message without providing the Petitioner a pre-decisional hearing, and without independent cogent reasons based on “reasons to believe,” is illegal and liable to be quashed.
Facts:
S. A. Enterprises (“the Petitioner”) is a registered dealer whose Electronic Credit Ledger for Input Tax Credit (“ITC”) of Rs. 33.33 lakhs was blocked by the Respondent.
The Assistant Commissioner of Central Tax (“the Respondent”) blocked the Petitioner’s ECrL by invoking Rule 86A of the CGST Rules, 2017, communicating the same through a text message without a detailed reason or prior hearing.
The Petitioner contended that the blocking order was unconstitutional, arbitrary, without pre-decisional hearing, and lacking independent reasons, thus violating the principles of natural justice and statutory procedural requirements.
The Respondent contended that the blocking was justified under Rule 86A because of reasons to believe that the ITC claimed was fraudulent or inadmissible, based on reports from enforcement authorities.
The Petitioner’s grievance was that the blocking order was passed mechanically on borrowed satisfaction from other officers’ reports, without an independent application of mind or providing a hearing, leading to the filing of Writ Petition before the High Court.
Issue:
Whether the Revenue authorities can block a taxpayer’s Electronic Credit Ledger under Rule 86A of the CGST Rules without providing pre-decisional hearing or independent, cogent reasons forming a reason to believe?
Held:
The Hon’ble Karnataka High Court in W.P. No. 27868 of 2025 held as under:
- Observed that, the power under Rule 86A to block the ECrL is drastic and onerous and requires strict compliance with mandatory pre-conditions including forming “reasons to believe” by independent application of mind.
- Noted that, the impugned order was passed merely by reliance on borrowed satisfaction from an enforcement officer’s field visit report without independent inquiry or recording any cogent reasons for blocking ITC.
- Held that, no pre-decisional hearing was given to the Petitioner prior to blocking, violating the principles of natural justice.
- Noted that, a mechanical order communicated only by SMS without detailing reasons or opportunity of hearing is invalid.
- Quashed the impugned order blocking the ECrL and directed immediate unblocking to enable the Petitioner to file returns.
Our Comments:
This judgment is an important judicial safeguard against the arbitrary exercise of power under Rule 86A CGST Rules, which involves blocking of ITC.
The judgment relies on the precedent K-9- Enterprises v. State of Karnataka[W.A. 100425/2023] which clarified that the expression “reason to believe” mandates satisfaction based on objective material and not mere borrowed or delegated satisfaction. Paragraph 3.4 of the CBEC Circular No. 20/16/05/2021 – GST/1552 dated November 02, 2021 deals with the remedy available to taxpayers when their ITC is blocked or restricted under Rule 86A of the CGST Rules. Specifically, it provides that if the ECrL is blocked or debited under Rule 86A of the CGST Rules, the affected taxpayer has the right to seek a remedy by making a representation or appeal against the blocking or debit action.
Similarly, in Safan Fasteners v. Assistant Commissioner [W.P. No. 9359/2025 dated April 08, 2025] this Court set aside the order, since no pre-decisional hearing was granted before passing the order and the order did not any contain independent or cogent reasons to believe, except placing reliance upon reports of enforcement authority, which was impermissible in law.
Relevant Provisions:
Rule 86A of the CGST Rules, 2017
“86A. Conditions of use of amount available in electronic credit ledger.-
(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-
a) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36-
issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
without receipt of goods or services or both; or
b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
c) the registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
d) the registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount.
(2) The Commissioner, or the officer authorised by him under sub-rule (1) may, upon being satisfied that conditions for disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.”
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