Karnataka HC quashes GST ITC Block u/r 86A for Relying on Enforcement Reports without Independent 'Reason to Believe' [Read Order]

In a recent judgment, the Karnataka High Court quashed the blocking of Input Tax Credit ( ITC ) under Rule 86A of the CGST/KGST Rules for solely relying on the enforcement authority reports without independent and cogent reasons to believe that justified such action.

The case was brought by A.M. Enterprises, a Bengaluru-based taxpayer, through a writ petition challenging the order dated 14.10.2024 issued by the Assistant Commissioner of Commercial Taxes. The petitioner’s credit ledger had been blocked on the grounds that ITC was availed fraudulently without actual receipt of goods, a conclusion drawn from reports submitted by enforcement officers.

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The petitioner’s counsel argued that the order was arbitrary and passed without any pre-decisional hearing. They further argued that the blocking was not supported by the officer’s own findings, but rather based on "borrowed satisfaction" from external reports, in violation of Rule 86A and related judicial guidelines.

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Justice S.R. Krishna Kum observed that the impugned order did not show any independent application of mind or tangible material forming the basis of “reason to believe.” The court explained that such action must follow strict procedural safeguards, including the officer’s own assessment and reasoning.

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

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The court allowed the petition, quashed the impugned order dated 14.10.2024, and directed the respondents to immediately unblock the petitioner’s Electronic Credit Ledger. The court granted liberty to the department to initiate fresh proceedings against the petitioner as per law, following the procedural safeguards outlined in the K-9 Enterprises judgment.

To Read the full text of the Order CLICK HERE

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