Facts of the Case:

In this case, the petitioner challenged a show cause notice issued by the department proposing action under Rule 86A of the CGST Rules. The petitioner also sought directions for unblocking the Input Tax Credit (ITC) in its Electronic Credit Ledger. The show cause notice alleged that the petitioner had supplied goods to M/s. Million Lights by issuing invoices without actual supply of goods, thereby passing on fraudulent ITC to the recipient. Based on this allegation, the department proposed to block the petitioner’s ITC under Rule 86A.

The petitioner contended that Rule 86A applies only where the registered person himself has fraudulently availed or ineligible ITC. In the present case, the allegation related to wrongful availment of ITC by the recipient (M/s. Million Lights) and not the petitioner. The petitioner also asserted that output tax on the transactions had already been paid.

Issue:

Whether Rule 86A of the CGST/KGST Rules can be invoked to block the ITC of a supplier when the allegation relates to fraudulent ITC availed by the recipient of supply.

Held that:

The Court observed that Rule 86A empowers the Commissioner or authorized officer to restrict the utilization of ITC in the electronic credit ledger only when the credit has been fraudulently availed or is ineligible in the hands of the registered person whose credit is being blocked. From a plain reading of Rule 86A, the power can be exercised in situations where ITC has been availed on invoices issued by non-existent suppliers, ITC has been availed without receipt of goods or services, tax relating to the supply has not been paid to the Government, the person claiming ITC is non-existent or lacks valid documents.

In the present case, the allegations in the show cause notice were that the petitioner had issued invoices without actual supply of goods, which allegedly enabled the recipient (M/s. Million Lights) to claim ITC fraudulently. The Court held that such allegations did not relate to fraudulent or ineligible ITC availed by the petitioner itself. Therefore, even if the department suspected wrongful ITC availment by the recipient, Rule 86A could be invoked only against the person who availed the ITC, and not against the supplier.

Consequently, the Court held that the show cause notice proposing to block the petitioner’s ITC under Rule 86A was improper and without jurisdiction. The notice was therefore set aside, and the department was directed to unblock the petitioner’s Electronic Credit Ledger forthwith.

The Court held that the invocation of Rule 86A against the petitioner was without jurisdiction.

Case Name: M/s. Sri Padmavathi Marketing Versus The Assistant Commissioner of Commercial Taxes, Lgsto, Bengaluru. dated 04.03.2026

To read the complete judgement 2026 Taxo.online 610