Karnataka High Court Quashes Order Blocking GST Input Tax Credit; Cites Lack of Hearing and Borrowed Satisfaction

Bengaluru, Karnataka – The Hon'ble Mr Justice S.R. KrishnaKumar of the Karnataka High Court, in a significant ruling on April 16, 2025, quashed an order by the Assistant Commissioner of Commercial Taxes that had blocked the Electronic Credit Ledger (ECL) of M/S A G Automotive. The court found the order, dated January 27, 2025, unsustainable due to the absence of a pre-decisional hearing and the lack of independent "reasons to believe," as mandated by law.

The writ petition (WP No. 11453 of 2025) was filed by M/S A G Automotive, represented by its proprietor Mr. Syed Billal , challenging the order which invoked Rule 86A of the Central Goods and Services Tax (CGST) Rules, 2017. The petitioner also sought a declaration that Rule 86A itself was unconstitutional, though the court's decision primarily focused on the procedural invalidity of the specific order.

Background of the Dispute

M/S A G Automotive's ECL was blocked by an order (No. ACCT/LGSTO-061/CTI/T2024-25) issued by the Assistant Commissioner of Commercial Taxes (Respondent No. 2). The petitioner contended that this action was taken without affording them an opportunity to be heard and without the assessing officer forming an independent opinion based on tangible material. The impugned order merely stated that the petitioner was not entitled to Input Tax Credit (ITC) from a non-existent firm, M/s SAR Traders, to the extent of Rs. 10,48,109.

Arguments Presented

Petitioner's Contentions (Advocate Sri. BHARATH KUMAR .V.): * No pre-decisional hearing was provided before the ECL was blocked, violating principles of natural justice. * The impugned order lacked any "reasons to believe" independently formed by the authority as to why blocking the ECL was necessary. * The action was contrary to the binding precedent set by a Division Bench of the Karnataka High Court in K-9-Enterprises Vs. State of Karnataka (W.A.No.100425/2023) .

Respondents' Stance (AGA Sri. HEMA KUMAR .K.): * The learned Additional Government Advocate supported the impugned order, arguing that the petition was without merit and liable to be dismissed.

High Court's Analysis and Reliance on Precedent

Justice S.R. KrishnaKumar meticulously examined the material on record and heavily relied on the principles laid down by the Division Bench in the K-9-Enterprises case.

The court noted that the K-9-Enterprises judgment had conclusively established two crucial points: 1. A pre-decisional hearing is mandatory before an ECL is blocked under Rule 86A. 2. The revenue authorities must have independent "reasons to believe" based on cogent material that ITC was fraudulently availed or ineligible, and cannot act on "borrowed satisfaction" from other officers' reports.

Key Principles from K-9-Enterprises Reiterated:

The court highlighted several findings from K-9-Enterprises that were pertinent:

Pre-Decisional Hearing: "…the learned Single Judge clearly fell in error in coming to the conclusion that a pre-decisional hearing was not required to have been provided/granted to the appellants by the respondents- revenue prior to passing the impugned orders blocking the ECL of the appellants…" (Para 8.13 of K-9)

Independent 'Reasons to Believe': The power under Rule 86A requires the officer to form an opinion based on their "own independent inquiry and not upon borrowed inquiry." (Para 9.1 of K-9)

Draconian Nature of Rule 86A: "Rule 86A was drastic and draconian in nature warranting existence of “reasons to believe” before exercising the said power by strictly complying with all the conditions / requirements of the said provision." (Para 9.2 of K-9) Blocking ECL based merely on investigation reports without application of mind is impermissible.

CBIC Circular Compliance: The CBIC Circular dated 02.11.2021 mandates careful examination, proper application of mind, and recording of reasons, emphasizing that Rule 86A should not be exercised mechanically.

No Mechanical Exercise of Power: "When a thing is directed to be done in a particular manner, it must be done in that manner or not at all is the well-established principle of administrative law." (Para 9.7 of K-9) Orders based on borrowed satisfaction are invalid.

Insufficiency of Supplier's Non-Existence: "…the mere closure of business in 2020 or 2021 cannot be a basis for denying credit availed earlier. All these factors required that the respondents-revenue ought to have carefully considered and verified all aspects before taking such a drastic action…" (Para 9.10 of K-9)

Applying these principles, Justice Kumar observed: > "In view of the aforesaid dictum of the Hon’ble Division Bench of this Court, I am of the considered opinion that in the instant case, since no pre-decisional hearing was provided/granted by the respondents before passing the impugned order, coupled with the fact that the impugned order invoking Section 86A of the CGST Rules by blocking of the Electronic credit ledger of the petitioner does not contain independent or cogent reasons to believe except by placing reliance upon the reports of Enforcement authority which is impermissible in law, since the same is on borrowed satisfaction as held by the Hon’ble Division Bench of this Court, the impugned order deserves to be quashed."

The court further noted the inadequacy of the reasoning in the impugned order: > "It is also pertinent to note that in the impugned order except stating that the petitioner is not entitled to take Input Tax Credit from non-existing firm M/s SAR Traders to the extent of Rs.10,48,109/-, no other reasons are forthcoming in the impugned order. On this ground also, the impugned order dated 27.01.2025 deserves to the quashed."

Decision and Directions

The High Court allowed the writ petition and passed the following orders: 1. The impugned order dated 27.01.2025 (Annexure-A) was quashed. 2. The concerned respondents were directed to unblock the Electronic Credit Ledger of the petitioner immediately upon receipt of the court's order, enabling the petitioner to file returns forthwith. 3. Liberty was reserved for the respondents to proceed against the petitioner in accordance with the law and in terms of the judgment in K-9-Enterprises Vs. State of Karnataka .

This judgment reinforces the critical importance of procedural fairness, including the right to a pre-decisional hearing, and the necessity for tax authorities to independently apply their minds and record cogent reasons before taking drastic measures such as blocking a taxpayer's Electronic Credit Ledger under Rule 86A of the CGST Rules.