ITC Blocked Under Rule 86A Without Prior Notice: Karnataka HC Quashes GST Order Citing Natural Justice Violation [Read Order]

The KarnatakaHigh Court held that blocking a taxpayer's Input Tax Credit (ITC) under Rule 86A of the CGST Act without issuing a prior notice amounts to a violation of the principles of natural justice, thereby rendering the blocking order unsustainable in law.

Justice B M Shyam Prasad, has quashed proceedings dated February 24, 2026, whereby the tax authorities blocked the electronic credit ledger of a proprietary concern holding Rs. 17,91,932/- in ITC. The Court directed the immediate unblocking of the ledger, reaffirming that the mandate of issuing a notice must be read into the statutory scheme of Rule 86A.

The petitioner, M/s GVS Engineering and Construction, approached the High Court through a writ petition under Articles 226 and 227 of the Constitution. The grievance stemmed from an intimation passed by the Assistant Commissioner of Commercial Taxes under Rule 86A of the CGST Act, 2017. The department had frozen the petitioner's ITC on the grounds that one of its suppliers, M/s Ganesh Traders, was found to be a "bill trader" involved in the issuance of fake invoices from a non-existent business premises.

K M Shivayogiswamy, the counsel for the petitioner, strongly contended that the ITC was blocked without granting any prior hearing or opportunity of being heard. He placed heavy reliance on a landmark decision of a Co-ordinate Bench of the Karnataka High Court in Writ Appeal No. 100425/2023, wherein it was explicitly observed that the requirement of a notice must be read into the Rule 86A framework to prevent arbitrary action and ensure adherence to the principles of natural justice.

K Hemakumar, the Additional Government Advocate appearing for the respondent, did not dispute the legal proposition that a notice is necessary. However, he argued that the Court should not interfere with separate show cause notices issued for the reversal of ITC, as those were independent proceedings in which the petitioner must participate.

Accepting the respondent's submission regarding the independent notices, the petitioner's counsel clarified that the challenge before the Court was strictly confined to the February 24, 2026, blocking proceedings.

Finding merit in the petitioner's limited grievance, the Court noted that the proposition regarding the necessity of a prior notice is settled law. In the absence of such a notice, the impugned blocking order was liable to be set aside. Allowing the petition in part, the Court quashed the February 24 proceedings.

The Court directed the respondent to immediately unblock the petitioner's electronic credit ledger upon receiving a certified copy of the order. However, the Court preserved the department's right to initiate fresh action, noting that the respondent will be at liberty to proceed against the petitioner in accordance with the proper procedural requirements laid down by the Division Bench.

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