Pre-decisional Hearing should be Provided before Blocking ECRL under GST Rule 86A: Supreme Court dismisses State's Petition [Read Judgement]

The Supreme Court dismisses State of Karnataka's petition wit regards to blocking of Input Tax Credit ( ITC ) under Goods and Services Tax ( GST ) on grounds of delay and lack of merits, thereby upholding the ruling of Karnataka High Court. Justices J.B. Pardiwala and R. Mahadevan dismissed the special leave petition filed by the State of Karnataka challenging the writ appeal decision noting that, “There is a delay of 243 days in filing the Special Leave Petitions which has not been satisfactorily explained. Even otherwise, we have gone through the Special Leave Petition and do not find any merit in the same.”

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The respondent of the present SLP’s ECRL was blocked by the Karnataka GST department on grounds of alleged ineligible or fraudulent input tax credit (ITC) claims. The blocking was initiated based on investigation reports without any independent inquiry or pre-hearing opportunity extended to the taxpayers.

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In this case, the court has granted the post-decisional hearing. The High Court, after extensively analyzing Rule 86A and relevant jurisprudence, ruled that the power to block credit under Rule 86A is a drastic one and entails serious civil consequences. Therefore, compliance with the principles of natural justice, including a pre-decisional hearing, is important unless exceptional circumstances exist.

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The Court found that the revenue department acted mechanically based on borrowed satisfaction from investigation reports and failed to establish "reasons to believe" with independent application of mind.

The high court cited authoritative precedents and CBIC Circular No. CBEC-20/16/05/2021-GST/1552 dated 02.11.2021 and concluded that the blocking of ITC in the ECL without a pre-show-cause notice violated procedural fairness. It thus quashed the orders blocking the credit and directed the authorities to restore the ECLs.

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The high court bench Justices S.R. Krishnakumar and G. Basavraja, while setting aside the single bench’s order noted that “the impugned orders passed by the respondents-revenue blocking the ECL of the appellants without providing/granting pre-decisional hearing and confirmed by the learned Single Judge deserve to be set aside. In view of the aforesaid discussion, we are of the considered opinion that the learned Single Judge clearly fell in error in coming to the conclusion that a pre-decisional hearing was not required to have been provided/granted to the appellants by the respondents-revenue prior to passing the impugned orders blocking the ECL of the appellants and consequently, the said findings recorded by the learned Single Judge deserve to be set aside.”

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The revenue's SLP against this order was dismissed by the Supreme Court, thereby upholding the High Court's decision. 

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