Facts of the case:

In this case, the petitioner challenged the action of the tax authorities in blocking its Electronic Credit Ledger (ECL) under Rule 86A of the CGST Rules, 2017. The blocking resulted in denial of Input Tax Credit. The impugned action was taken pursuant to a communication issued by the Enforcement Wing, alleging that the petitioner had availed ITC from non-existent suppliers and that multiple e-way bills were generated for the same vehicle on the same day for different routes.

The petitioner contended that no pre-decisional hearing was granted before blocking the ECL, impugned order did not record any independent “reasons to believe” as mandated under Rule 86A. The order was based solely on enforcement reports, amounting to borrowed satisfaction. Also, the action was contrary to principles of natural justice and binding precedent of the Karnataka High Court in K-9-Enterprises v. State of Karnataka.

Issue:

Whether the blocking of the petitioner’s Electronic Credit Ledger under Rule 86A of the CGST Rules, 2017, without granting a pre-decisional hearing and without recording independent and cogent “reasons to believe”, based solely on enforcement reports, is legally sustainable.

Held that:

The Court held that Rule 86A confers a drastic and extraordinary power, which directly affects the valuable vested right of a taxpayer to utilize ITC. Therefore, strict compliance with the indications of the statute and rules is mandatory. The authority invoking Rule 86A must not only have “reasons to believe” but such reasons must be independently arrived at, based on tangible material, and duly recorded in writing. 

Reliance was placed extensively on the judgment in K-9-Enterprises, wherein the Court reiterated that Pre-decisional hearing is mandatory before blocking the ECL. “Reasons to believe” cannot be based on borrowed satisfaction or mere enforcement communications. Further, “Reasons to believe” cannot be based on borrowed satisfaction or mere enforcement communications. Mechanical reliance on investigation or field visit reports without independent application of mind vitiates the action.

Since the impugned order neither granted a pre-decisional hearing nor disclosed independent, cogent reasons to believe, it was held to be arbitrary, non-speaking, violative of natural justice, and contrary to Rule 86A. Accordingly, the Court directed immediate unblocking of the petitioner’s ECL, while reserving liberty to the department to proceed afresh in accordance with law and the principles laid down in K-9-Enterprises.

Case Name: RDTMT Steels (India) (P.) Ltd. v. Assistant Commissioner of Commercial Tax (Admin), Mandya dated 11.12.2025

To read the complete judgement 2025 Taxo.online 3491