Revenue authority blocked Input Tax Credit under Rule 86A without hearing, violating natural justice principles

Karnataka HC quashed an order blocking Input Tax Credit under Rule 86A of CGST/SGST Rules, 2017. The court held that blocking ITC without providing pre-decisional hearing violated principles of natural justice. The impugned order lacked independent reasoning and relied impermissibly on enforcement authority reports, constituting "borrowed satisfaction." The order failed to provide adequate reasons beyond stating the registered person was found non-existent. Following precedent in K-9-Enterprises case, HC directed immediate unblocking of petitioner's ITC and allowed the petition.

---

---

Issues Involved:

1. Legality of the impugned order blocking Input Tax Credit (ITC) under Rule 86A of the CGST Rules.
2. Requirement of pre-decisional hearing before blocking ITC.
3. Validity of the reasons provided for blocking ITC.
4. Reliance on borrowed satisfaction for blocking ITC.

Detailed Analysis:

1. Legality of the Impugned Order Blocking ITC:

The petitioner challenged the order dated 09.07.2024, which blocked their Input Tax Credit (ITC) by invoking Rule 86A of the Central Goods and Services Tax Rules, 2017. The petitioner argued that the order was arbitrary and lacked a proper legal basis, as it did not provide independent reasons for blocking the ITC. The court referred to the precedent set in K-9-Enterprises Vs. State of Karnataka, where it was held that Rule 86A is a drastic measure that requires strict compliance with its conditions. The impugned order was deemed illegal as it failed to meet these requirements.

2. Requirement of Pre-decisional Hearing:

The petitioner contended that the impugned order was passed without providing a pre-decisional hearing, which is a violation of principles of natural justice. The court agreed, citing the Division Bench's decision in K-9-Enterprises, which emphasized the necessity of a pre-decisional hearing before blocking ITC. The absence of such a hearing in the present case was a significant procedural lapse, warranting the quashing of the order.

3. Validity of the Reasons Provided for Blocking ITC:

The court scrutinized the reasons cited in the impugned order for blocking the ITC. It was found that the order lacked cogent reasons to believe that the ITC was fraudulently availed or ineligible. The only justification provided was the alleged non-existence of the petitioner's business, which was not substantiated with independent evidence. The court highlighted that the reasons must be based on tangible material and not mere suspicion or borrowed satisfaction, as per the guidelines in the CBIC Circular dated 02.11.2021.

4. Reliance on Borrowed Satisfaction for Blocking ITC:

The court criticized the reliance on borrowed satisfaction from other officers' reports to justify the blocking of ITC. It was noted that the impugned order was based on a field visit report by another officer, rather than an independent inquiry by the authority issuing the order. The court reiterated that the authority must form its own opinion based on an independent analysis of the facts, rather than relying on external reports. This failure to independently verify the facts constituted a grave error, leading to the quashing of the order.

Conclusion:

The court allowed the petition, quashing the impugned order dated 09.07.2024. It directed the respondents to immediately unblock the ITC of the petitioner, enabling them to file returns. The court also granted liberty to the respondents to proceed against the petitioner in accordance with the law, as per the judgment in K-9-Enterprises. The judgment underscores the importance of adhering to procedural fairness and the necessity of independent reasoning in administrative actions under the CGST Rules.

---