Facts of the Case

M/S RDTMT Steels (India) Private Limited's Electronic Credit Ledger (ECL) was blocked by a communication dated 19.11.2025, invoking Rule 86A of the CGST Rules, 2017, pursuant to a reference from the Assistant Commissioner of Central Tax, Preventive Unit, Mysuru CGST Commissionerate. The blocking resulted in restriction of ITC amounting to Rs.12,26,36,340/- in the petitioner's ECL. The petitioner sought quashing of the blocking order on the ground that no pre-decisional hearing was granted and that the order disclosed no independent reasons to believe.

Issues Involved

  1. Whether a pre-decisional hearing is required before blocking a taxpayer's Electronic Credit Ledger under Rule 86A.
  2. Whether an ECL can be blocked merely on the basis of another officer's field-visit report or investigation findings, without the blocking officer independently forming "reasons to believe".

Petitioner's Arguments

  • No pre-decisional hearing was provided before passing the impugned blocking order, and the order did not disclose any independent "reason to believe" as required under Rule 86A.
  • The issue stood covered by the Division Bench ruling in K-9 Enterprises Vs. State of Karnataka, W.A. No. 100425/2023 and connected matters, decided on 02.04.2024.

Respondent's Arguments

  • Learned HCGP supported the impugned order, contending there was no merit in the petition.

Court Order / Findings

  • Following K-9 Enterprises, the Court held that blocking of an ECL under Rule 86A requires two mandatory pre-conditions: existence of material forming the basis for the belief, and recording of that belief in writing — and that a pre-decisional hearing is also required before such drastic action.
  • Rule 86A is drastic in nature and its "reason to believe" must reflect the officer's own independent application of mind, not "borrowed satisfaction" from another officer's field-visit report; the CBIC Circular dated 02.11.2021 was relied upon to reinforce this requirement.
  • The impugned order was passed solely on the basis of a communication/field-visit report by another officer (Vasco-da-Gama, Goa), without independent verification or reasons, and no pre-decisional hearing had been granted — both grounds rendered the order bald, vague, cryptic and unsustainable.
  • The impugned orders blocking the ECL were quashed, with a direction to unblock the ledger immediately, while reserving liberty to the Department to proceed afresh in accordance with law and in terms of K-9 Enterprises.

Important Clarification

  • Blocking an Electronic Credit Ledger under Rule 86A requires the officer's own independent "reasons to believe", recorded in writing, based on tangible material — reliance on another officer's investigation report or field-visit findings without independent verification amounts to impermissible "borrowed satisfaction".
  • A pre-decisional hearing must ordinarily be afforded before an ECL is blocked, given the drastic and extraordinary nature of the power; failure to do so, coupled with an unreasoned order, renders the blocking order liable to be quashed, though the Department remains free to proceed afresh in accordance with law.

Sections Involved

  • Rule 86A, CGST Rules, 2017 – power to disallow debit from the electronic credit ledger where ITC is believed to be fraudulently availed or ineligible.

Decision – In Favour of

Decided in favour of the Assessee. The blocking order was quashed, with the Department's ECL to be unblocked and liberty reserved to proceed afresh lawfully.

Case Details

  • Court: High Court of Karnataka at Bengaluru
  • Case No.: Writ Petition No. 37316 of 2025 (T-RES); NC: 2025:KHC:52874
  • Coram: Hon'ble Mr. Justice S.R. Krishna Kumar
  • Date of Order: 11 December 2025

Link to Download the Order

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