• Dated 31^th October, 2025

Order Blocking Electronic Credit Ledger Set Aside - Violation of Natural Justice

Brief Facts

The petitioner, M/s DDS Jewels Pvt. Ltd., challenged the departmental order dated 2nd July, 2025 that restricted the use of Input Tax Credit in its Electronic Credit Ledger (ECL) under Rule 86A(2) of the CGST/MGST Rules, 2017.Prior to these orders, the department had issued communications dated 30th June, 2025 proposing action under Rule 86A and directed the petitioner to submit a reply by 3rd July, 2025. The petitioner duly submitted its reply on 2nd July, 2025, which was received by the department on 3rd July, 2025. However, the department passed the impugned orders on 2nd July, 2025, before the expiry of the time limit indicated in the communications.

Assessee's Contention

1. The notices dated 30th June, 2025 were in the nature of Show Cause Notices, and hence, on the basis of principles of natural justice, the department is required to wait until the prescribed deadline (3rd July, 2025) before taking any adverse action.
2. The reply filed within time was completely ignored, making the action arbitrary and violative of fairness and due process.
3. Consequently, the order blocking the ITC ledger (ECL) was invalid and required to be quashed.

Department's Contention

1. The department argued that the communications dated 30th June, 2025 were not show cause notices, but mere intimations of the proposed action under Rule 86A.
2. It was further contended that Rule 86A does not mandate issuance of a show cause notice prior to restricting the credit ledger, and hence, the action was within jurisdiction.

Conclusion

The Bombay High Court held that the communication dated 30 June 2025 was indeed a show cause notice, and having chosen to issue them, the department was bound to observe principles of fairness. Passing the impugned orders before expiry of the deadline of the reply and without considering the petitioner's timely reply amounted to violation of natural justice.

The impugned orders dated 02 July 2025 were therefore quashed and set aside. The department was directed to restore the Electronic Credit Ledger and reconsider the show cause notices after granting the petitioner a personal hearing by 10 October 2025.

The case was therefore held in favour of the Appellant.

BTA Remarks

This judgment reinforces the importance of adhering to the principles of natural justice even in cases involving preventive measures like ITC blocking under Rule 86A. The Bombay High Court made it clear that once the department chooses to issue a show-cause notice and prescribes a time for reply, it cannot proceed prematurely without awaiting the taxpayer's response. Such action renders the order procedurally invalid, regardless of the merits of the underlying allegations.

Citation: (2025) 35 Centax 129 (Bom.) - DDS Jewels Pvt. Ltd. v. State of Maharashtra

Decision Date: 18 September 2025

Author: Siddharth Kumar Shaw

Edited by: Shaily Gupta