Facts of the Case

RDTMT Steels (India) Private Limited's Electronic Credit Ledger (ECL) was blocked by the Assistant Commissioner of Commercial Tax vide a communication dated 19.11.2025 (Reference No. GEXCOM/AE/INV/GST/6173/2024-AE/O), invoking Rule 86A of the Central Goods and Services Tax Rules, 2017. The blocking prevented the petitioner from utilising input tax credit of Rs.12,26,36,340 lying in its ECL. The impugned communication recorded that the petitioner had received ITC from non-existent suppliers and that multiple e-way bills had been issued for the same vehicle on the same day for different routes, but did not disclose independent reasoning of the officer, nor was any pre-decisional hearing granted to the petitioner before the blocking order was passed. The petitioner approached the High Court of Karnataka under Articles 226 and 227, seeking to quash the blocking order and restore the ITC.

Issues Involved

  1. Whether an order blocking the Electronic Credit Ledger under Rule 86A can be passed without granting a pre-decisional hearing to the assessee.
  2. Whether the blocking order can validly rest on the "borrowed satisfaction" of another officer's investigation or field report, without the blocking officer independently forming "reasons to believe" on tangible material.

Petitioner's Arguments

  • No pre-decisional hearing was granted before passing the impugned order, and it did not disclose any independent reason to believe why blocking of the ECL was necessary.
  • Relied on the Division Bench ruling in K-9 Enterprises v. State of Karnataka (W.A. No. 100425/2023 & connected matters), which held that a pre-decisional hearing must be granted before blocking the ECL under Rule 86A, and that the blocking officer must arrive at independent satisfaction rather than acting on another authority's borrowed satisfaction.
  • Sought quashing of the blocking communication dated 19.11.2025 and restoration of the blocked ITC of Rs.12,26,36,340.

Respondent's Arguments

  • Supported the impugned order and submitted that there was no merit in the petition, which was liable to be dismissed.

Court Order / Findings

  • Following K-9 Enterprises, held that Rule 86A is a drastic and draconian power that must be exercised strictly in accordance with its twin pre-requisites — material on record and recorded "reasons to believe" — and cannot be invoked mechanically.
  • The impugned order was passed solely on the basis of a communication/investigation report from another officer without any independent application of mind, amounting to impermissible "borrowed satisfaction" rather than the blocking officer's own reasoned belief, contrary to the CBIC Circular dated 02.11.2021 governing invocation of Rule 86A.
  • No pre-decisional hearing was granted to the petitioner before the ECL was blocked, which was itself fatal to the impugned action.
  • Held the impugned order to be "bald, vague, cryptic, unreasoned and non-speaking", and accordingly quashed the blocking communications dated 19.11.2025.
  • Directed the respondents to immediately unblock the petitioner's Electronic Credit Ledger to enable it to file returns, while reserving liberty to the respondents to proceed afresh against the petitioner in accordance with law and consistent with the K-9 Enterprises ruling.

Important Clarification

  • Before blocking a taxpayer's Electronic Credit Ledger under Rule 86A, the competent officer must independently form "reasons to believe", based on tangible material and confined to the specific grounds enumerated in Rule 86A(1), rather than mechanically acting on another officer's investigation or field report.
  • Reliance on such "borrowed satisfaction" without independent verification of the genuineness of the underlying transactions vitiates the blocking order.
  • A pre-decisional hearing must ordinarily be afforded to the taxpayer before an order blocking the ECL is passed, given the drastic and extraordinary nature of the power under Rule 86A.

Sections Involved

  • Rule 86A, Central Goods and Services Tax Rules, 2017 — empowers the Commissioner or an authorised officer to disallow debit from the electronic credit ledger where there are reasons to believe that the ITC has been fraudulently availed or is ineligible.
  • Article 226 and 227, Constitution of India — writ jurisdiction invoked to challenge the blocking of the electronic credit ledger.

Decision – In Favour of

The writ petition is allowed in favour of the Assessee, with the Rule 86A blocking orders quashed and immediate unblocking of the Electronic Credit Ledger directed, while liberty is reserved to the Department to proceed afresh in accordance with law.

Case Details

Court: High Court of Karnataka at Bengaluru
Case No.: Writ Petition No. 37316 of 2025 (T-RES)
Coram: Hon'ble Mr. Justice S.R. Krishna Kumar
Date of Order: 11 December 2025
Petitioner's Counsel: Sri Shreehari Kutsa
Respondent's Counsel: Smt. Jyoti M. Maradi, HCGP

Link to Download the Order

Click here to view/download the full order

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.