• Dated 02^nd July, 2025

Supreme Court Emphasizes Independent Verification before Blocking ITC

Brief Facts:

The genesis of the dispute involves the tax authorities' (department) action of blocking the Electronic Credit Ledgers (ECLs) of K-9 Enterprises (Assessee) by invoking Rule 86A of the Central Goods and Services Tax Rules, 2017. This drastic measure was reportedly taken based on intelligence suggesting that the Assessee's suppliers were non-existent. Crucially, this blocking occurred without affording the taxpayer a prior opportunity for a hearing. The Karnataka High Court, after hearing the Assessee's writ petitions, had ruled decisively in their favor, setting aside the blocking orders. Being dissatisfied with this outcome, which curtailed their perceived administrative powers, the revenue escalated the matter to the Supreme Court.

Assessee's Contention:

The Assessee contended that the blocking of their Electronic Credit Ledger (ECL) was effectedwithout adherence to the principles of natural justice, as no pre-decisional hearing was granted. They emphasized the draconian nature of Rule 86A of the CGST Rules and highlighted the serious civil consequences that result from the blocking of Input Tax Credit (ITC), arguing that such action mandates strict compliance with the principles of natural justice, including a mandatory opportunity to be heard beforehand. It was further asserted that the revenue authorities acted on "borrowed satisfaction" rather than conducting an independent and objective application of mind. The Assessee, being a bona fide purchaser, should not be penalized for the alleged defaults of their suppliers without proper verification of the genuineness of the underlying transactions. ITC, being a vested right, can only be restricted or denied through due process and on the basis of concrete, independently verified evidence of fraud that is directly attributable to the recipient.

Department's Contention:

The department argued that the blocking was validly done on the basis of credible information obtained during the field inspection. They maintained that the "reasons to believe" standard under Rule 86A was met; as the investigation revealed that several suppliers were fictitious, indicating a fraudulent availing of ITC. The procedural requirements, particularly for a pre-decisional hearing in cases involving potential fraud, should be viewed flexibly to prevent the dissipation of ill-gotten gains.

Decision:

The Supreme Court, after considering the arguments presented, dismissed thedepartment's Special Leave Petition. This dismissal signifies the Supreme Court's agreement with the fundamental principles articulated by the Karnataka High Court. The Court emphasized the necessity of a pre-decisional hearing, given the significant implications of such a decision. It found that the mandatory conditions under Rule 86A were not satisfied and that the order was passed without proper application of mind.

BTA's Comment:

This case, culminating in the Supreme Court's dismissal of the revenue's SLP, stands as a significant judicial pronouncement on the exercise of administrative powers under GST law. It unequivocally affirms that the blocking of Input Tax Credit, a critical business resource, cannot be done arbitrarily or based on mere suspicion or borrowed information. The judiciary has strongly reinforced the imperative of procedural safeguards, particularly the right to a fair hearing, and the necessity for tax authorities to apply their independent mind based on objective, verifiable material before taking such drastic measures. This ruling enhances judicial oversight over GST administrative actions, ensuring greater accountability and protecting the legitimate rights of taxpayers against high-handed or mechanical application of the law, thereby promoting a more equitable and transparent tax regime.

Case Reference: State of Karnataka &Anr. vs. K-9 Enterprises(2025) 30 Centax 281 (S.C.)

Author: Aindrila Ghosh

Edited by: Shaily Gupta