Blocking ITC Without Independent “Reasons to Believe” Violates Rule 86A of KGST Rules: Karnataka HC Quashes ECL Freeze [Read Order]

The High Court of Karnataka quashed an order blocking the electronic credit ledger (ECL) of the petitioner, a Hubballi‑based firm, under Rule 86A of the Central Goods and Services Tax (CGST/KGST) Rules, 2017, holding that blocking ITC without independent “reasons to believe” violates Rule 86A

The petitioner, Bee Jay Engineers, challenged the Assistant Commissioner’s order dated 6 November 2025, which froze its input tax credit, arguing that the action was arbitrary, unsupported by reasons, and violative of statutory safeguards.

The petitioner argued that the blocking was arbitrary and illegal, as no pre‑decisional hearing was provided and the order failed to record independent “reasons to believe” as required under Rule 86A.

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It was contended that the action was based solely on communications and field visit reports from other officers, without any independent inquiry or application of mind by the jurisdictional authority. The petitioner stressed that ITC is a valuable statutory right, and denial without due process results in cascading tax burdens and irreparable hardship.

The State defended the order, asserting that blocking was necessary to protect revenue interests.

The Court observed that in the Bee Jay Engineers’ case, the blocking order was passed mechanically, relying solely on communications and field visit reports from other officers, without any independent inquiry or application of mind by the jurisdictional authority.

Such “borrowed satisfaction,” the Court held, does not meet the statutory requirement of forming an opinion under Rule 86A. The order was also cryptic, vague, and non‑speaking, failing to disclose the basis for the drastic measure.

Quoting extensively from the Division Bench’s ruling in K‑9 Enterprises, the Court reiterated that two prerequisites must be satisfied before invoking Rule 86A: (i) the existence of material justifying action, and (ii) recording of reasons in writing. Unless these conditions are fulfilled, blocking of ECL is impermissible.

The Court further highlighted that ITC is a valuable right forming part of the GST framework’s value‑added tax principle, and denial of credit without due process leads to cascading tax burdens and irreparable hardship to bona fide taxpayers.

The judgment also referred to CBIC’s Circular dated 2 November 2021, which clarified that blocking of ECL must be exercised with utmost circumspection, only after careful examination of facts, and never in a mechanical manner.

The Court underscored that Rule 86A creates a disability for taxpayers to use credit legitimately available to them, and therefore demands strict compliance with procedural safeguards.

In addition, Justice M Nagaprasanna drew parallels with the Supreme Court’s decision in Radha Krishan Industries v. State of Himachal Pradesh, which held that provisional attachment powers under Section 83 of the CGST Act are extraordinary and must be exercised only upon formation of an opinion based on tangible material, with proportionality and necessity guiding the decision.

Applying the same principles, the Court concluded that the blocking of Bee Jay Engineers’ ledger was ultra vires Rule 86A. Accordingly, the writ petition was allowed, and the impugned order was quashed.

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