Rule 86A of the CGST/KGST Rules, 2017, can only be invoked to block Input Tax Credit (ITC) if the assessee themselves fraudulently availed or is ineligible for such credit; it cannot be used to block a supplier's credit based on the fraudulent availment of ITC by their customer.

Digitally signed by VIJAYA P Location: AND: HIGH COURT OF KARNATAKA

THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE IMPUGNED SHOW CAUSE NOTICE DATED 10.11 2025 BEARING NO. ACCT(LGSTO)-111/ITC BLOCK/2025-26 ISSUED BY THE RESPONDENT (ANNEXURE - A) AND ETC.,

THIS PETITION, COMING ON FOR PRELIMINARY HEARING, THIS DAY, ORDER WAS MADE THEREIN AS UNDER:

CORAM: HON'BLE MR. JUSTICE S SUNIL DUTT YADAV

ORAL ORDER

The petitioner has sought to challenge the impugned show-cause notice at Annexure-A dated 10.11.2025. The Petitioner has also sought for issuance of writ of mandamus to direct the respondents to unblock and restore the Input Tax Credit (ITC) of Rs.1,96,58,274/- in the Electronic Credit Ledger of the petitioner. The petitioner has sought for certain other allied reliefs.

Learned counsel for the petitioner submits that the show-cause notice at Annexure-A calls upon the petitioner to show cause as to why the supply of goods in favour of M/s. Million Lights by passing on the fraudulent Input Tax Credit, without underlying supply of goods, be treated as irregular and as to why action ought not to be initiated under provision of Rule 86A of Central Goods and Service Tax / Karnataka Goods and Service Tax Rules, 2017 (for short 'CGST/KGST Rules').

It is the contention of the petitioner that Rule 86A can be invoked where the petitioner has availed of ITC wrongfully and cannot be pressed where allegation is of the customer of the petitioner as having availed of ITC illegally. It is submitted that as regards the transactions with M/s. Million Lights, the petitioner has paid output tax and such aspect cannot be made subject matter of exercise of power under Rule 86A .

Sri. K. Hemakumar, learned Additional Government Advocate submits that as regards the customer of the petitioner i.e., M/s. Million Lights, it appears that the department is investigating regarding wrongful availment of ITC. It is further specifically asserted that the partner of the petitioner-firm has made certain admissions relating to transactions with M/s. Million Lights relating to issue of invoices without actual supply of goods.

However, learned counsel for the petitioner apart from denying such allegations, specifically submits that even if it were to be proved, the power under Rule 86A cannot be pressed into force. Rule 86A of the CGST / KGST Rules reads as follows:

" Rule 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-

(i) 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

(ii) 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 aut