• Dated 05^th June, 2025

The Karnataka High Court held that blocking Electronic Credit Ledger based solely on enforcement reports and without independent reasons is unsustainable:

Brief Facts

The Petitioner, M/s Ittefaq Steels and Scrap Traders, is a registered taxpayer under the GST regime. On 03.09.2024, the Assistant Commissioner of Commercial Tax, Mysore, blocked the Petitioner's Electronic Credit Ledger by invoking Rule 86A of the CGST/KGST Rules, 2017. The order only stated that the petitioner was found non-existent or not conducting business from the registered premises and was passed solely based on enforcement reports without any independent reasoning or material evidence. No pre-decisional hearing was granted to the petitioner prior to the issuance of the order. Aggrieved by this action, the Petitioner approached the High Court of Karnataka seeking appropriate relief.

Petitioner's Contention

The Petitioner contended that pre-decisional hearing was not provided to them by the Respondents before passing the impugned order and the same did not contain any reason to believe as to why it was required to block electronic credit ledger. Citing previous rulings, particularly the decision in K-9-Enterprises v. State of Karnataka, the Petitioner argued that the Commissioner, or an officer authorised by him, not below the rank of Assistant Commissioner, must have "reasons to believe" that credit of input tax available in the Electronic Credit Ledger is either ineligible or has been fraudulently availed by the registered person, before disallowing the debit of amount from electronic credit ledger of the said registered person under Rule 86A of the CGST Rules, 2017.

Respondent's Contention

The Revenue Department argued that the Petitioner was found non-existent and not conducting any business from any places for which registration was obtained. Thus, Rule 86A was violated and there was sufficient "reason to believe" that the credit of input tax in the Electronic Credit Ledger requires to be blocked.

Court's Decision

The Hon'ble High Court held that pre-decisional hearing was required for invoking Rule 86A. In the instant case, since no pre-decisional hearing were provided by Respondents before passing impugned order, coupled with fact that impugned order invoking Rule 86A blocking of Electronic Credit Ledger of the Petitioner did not contain independent or cogent reasons to believe by placing reliance upon reports of enforcement authority which was impermissible in law and since same was based on borrowed satisfaction as held by the Division Bench, impugned order deserves to be quashed. It was also pertinent to note that impugned order except stating that he had been found non-existent or not to be conducting any business from any places for which registration had been obtained, no other reasons are forthcoming in impugned order. In view of decision in K-9, supra, impugned order was to be quashed and Electronic Credit Ledger was to be immediately unblocked. Liberty was reserved in favour of the Authorities to proceed against the Petitioner in accordance with law.

BTA Remarks

This judgment reinstills the rule that Electronic Credit Ledger must not be blocked merely because the Petitioner was found to be non-existent and not conducting any business from the registered places of business. It is reiterated that the power of disallowing debit of amount from Electronic Credit Ledger must not be exercised in a mechanical manner. A careful examination of all the facts of the case is important to determine whether it is a fit case for exercising power under rule 86A. It contemplates an objective determination based on intelligent care and evaluation, as distinguished from a purely subjective consideration of mere suspicion. The reasons must be founded on material evidence available or gathered in relation to fraudulent availment of input tax credit or ineligible input tax credit availed as per the conditions under sub-rule (1) of rule 86A. It is well settled that the expression 'reason to believe' necessarily implies that the Revenue Department must arrive at a satisfaction based on their own independent inquiry and not upon borrowed inquiry as has been done in the instant case.

Case reference:Ittefaq Steels and Scarp Traders Versus Additional Chief Secretary (2025) 30 Centax 392 (Kar.)

Author: Ayona Chakrabarty

Edited by: Shaily Gupta