Karnataka HC Rejects ITC Blocking Under GST Rule 86A Due to Lack of Independent Justification

The Karnataka High Court, in its ruling, quashed the blocking of Input Tax Credit (ITC) under Rule 86A of the CGST/KGST Rules, stating that it was based solely on enforcement authority reports without independent and compelling justification for such measures.

The case was brought by A.M. Enterprises, a Bengaluru-based taxpayer, via a writ petition contesting the order dated 14.10.2024 issued by the Assistant Commissioner of Commercial Taxes. The credit ledger of the applicant had been blocked because Input tax credit (ITC) was availed of fraudulently without actual receipt of goods, a conclusion drawn from reports submitted by enforcement officers.

The counsel of the applicant asserted that the order was arbitrary and passed without any pre-decisional hearing. They also cited that the restriction was not supported via the officer’s findings, but rather based on “borrowed satisfaction” from external reports, in breach of rule 86A and pertinent judicial norms.

Justice S.R. Krishna Kum noted that the impugned order did not show any independent application of mind or actual material constituting the basis of “reason to believe.” As per the court, the same action is to be followed with stringent procedural safeguards along with the officer’s sum assessment and reasoning.

Read Also: Delhi HC: Rule 86A Does Not Require Taxpayers to Fulfill Any Conditions to Claim GST ITC

The court referenced the Division Bench decision in K-9 Enterprises v. State of Karnataka, which carried that Rule 86A is an extreme provision and cannot be invoked mechanically or without proper justification. The court reaffirmed that a mere report from another officer is not adequate to block a taxpayer’s credit ledger.

The petition as authorised by the court, quashed the impugned order on 14.10.2024 and asked the respondents to unblock the Electronic Credit Ledger of the applicant. The court granted liberty to the department to start fresh proceedings against the applicant under the law, following the procedural safeguards specified in the K-9 Enterprises judgment.