2025 (12) TMI 202 - HC - GST

Rule 86A credit ledger block quashed for lack of hearing and independent reasons; electronic credit restored

HC allowed the writ petition challenging the blocking of petitioner's electronic credit ledger under Rule 86A of the CGST/KGST Rules. It held that the ... Blocking of credit ledger of the petitioner - invocation of Rule 86A of the Central Goods and Services Tax Rules, 2017 - continuation of blocking of the electronic credit ledger after expiry of the one-year period prescribed in Rule 86A(3) - HELD THAT:- A perusal of the material on record will indicate that the Electronic credit ledger of the petitioner was blocked by the impugned order at Annexure-A dated 06.09.2024, by invoking Rule 86A of the Central Goods and Services Tax Rules, 2017 (the CGST Rules). In this context, learned counsel for the petitioner invited attention to the material on record in order to point out that before passing the impugned order, pre-decisional hearing was not provided to the petitioner nor does the impugned order contain any reason to believe as to why it was necessary to block the Electronic credit ledger and in view of the aforesaid contravention as held by the Division Bench of this Court in the case of K-9-ENTERPRISES vs. STATE OF KARNATAKA [2024 (10) TMI 491 - KARNATAKA HIGH COURT], the impugned order deserves to be quashed. In view of the aforesaid dictum of the Division Bench of this Court, it is opined that in the instant case since no pre-decisional hearing was provided/granted by the respondents before passing the impugned order, coupled with the fact that the impugned order invoking 86A of the KGST/CGST Rules by blocking of the Electronic credit ledger of the petitioner does not contain independent or cogent reasons to believe/accept by placing reliance upon reports of enforcement authority which is impermissible in law, since the same is on borrowed satisfaction as held by the Division Bench, the impugned order deserves to be quashed. The concerned respondents are directed to unblock the Electronic credit ledger of the petitioner immediately upon the receipt of copy of this order, so as to enable the petitioner to file returns forthwith - the impugned order is hereby quashed - petition allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the order blocking the electronic credit ledger by invoking Rule 86A of the KGST/CGST Rules, 2017 is vitiated for want of pre-decisional hearing and absence of recorded 'reasons to believe'. 1.2 Whether an order under Rule 86A can validly be based on 'borrowed satisfaction' or mere reference to enforcement reports, without independent application of mind and cogent reasons in the order. 1.3 Whether the continued blocking of the electronic credit ledger is impermissible after expiry of the one-year period prescribed in Rule 86A(3). 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Validity of blocking order under Rule 86A for want of pre-decisional hearing and recorded 'reasons to believe' Legal framework (as discussed): The Court considered Rule 86A of the CGST Rules, 2017 and the binding Division Bench decision in K-9 Enterprises, which held that: (i) pre-decisional hearing is required before blocking an electronic credit ledger; and (ii) the competent authority must have and record 'reasons to believe' based on tangible, cogent material that ITC is fraudulently availed or ineligible. The Court also took note of the CBIC Circular dated 02.11.2021 elaborating the preconditions, the need for objective satisfaction and careful, non-mechanical exercise of this 'drastic and draconian' power. Interpretation and reasoning: The Court applied the principles in K-9 Enterprises that: (a) Rule 86A requires two prerequisites-material before the authority and recording of reasons in writing-as mandatory conditions for blocking the electronic credit ledger; (b) power under Rule 86A is extraordinary and must be exercised with utmost circumspection, on objective material, and cannot be based on mere suspicion or mechanical reliance on investigation reports; and (c) ITC is a valuable right and cannot be disabled without strict adherence to statutory safeguards. In the present case, the Court found that no pre-decisional hearing was afforded to the petitioner before passing the impugned order and that the order did not disclose any independent, cogent 'reasons to believe' justifying the blocking of the electronic credit ledger. Conclusions: The Court held that the blocking order under Rule 86A was contrary to the mandatory requirements laid down in K-9 Enterprises and Rule 86A itself, for want of pre-decisional hearing and for failure to record proper 'reasons to believe', and on this ground the impugned order was liable to be quashed. 2.2 Reliance on 'borrowed satisfaction' and absence of independent application of mind Legal framework (as discussed): Referring to K-9 Enterprises and the CBIC Circular, the Court reiterated that the authority invoking Rule 86A must form its own opinion on 'reasons to believe' based on independent inquiry and objective material, and cannot act merely on directions, communications or investigation reports of other officers ('borrowed satisfaction'). Interpretation and reasoning: The Court noted that, as in K-9 Enterprises, the impugned blocking order relied on reports of the enforcement authority without demonstrating independent analysis or satisfaction. It emphasised that an order under Rule 86A cannot be passed mechanically or solely on investigation material, and that reasons must show a genuine, independent evaluation of whether ITC has been fraudulently or ineligibly availed. The Court further observed that, apart from a bare assertion that the petitioner had availed ITC fraudulently by receiving invoices without physical receipt of goods, no further reasons or examination of facts were set out in the impugned order. Conclusions: The Court held that the impugned order was based on impermissible 'borrowed satisfaction', was bald, vague, cryptic, unreasoned and non-speaking, and therefore invalid under the standards laid down in K-9 Enterprises. On this ground also, the order blocking the electronic credit ledger was quashed. 2.3 Effect of expiry of one-year period under Rule 86A(3) Legal framework (as discussed): The Court referred to the statutory limitation contained in Rule 86A(3), which prescribes that the restriction on use of amount available in the electronic credit ledger shall cease to have effect after one year from the date of imposing such restriction. Interpretation and reasoning: The Court recorded the undisputed fact that the impugned order blocking the petitioner's electronic credit ledger was passed on 06.09.2024 and that the one-year period prescribed under Rule 86A(3) had expired. It held that, by operation of the rule itself, continuation of the blocking of the electronic credit ledger beyond the one-year period was impermissible. Conclusions: The Court concluded that, independent of the other defects, the impugned order could not survive after expiry of the one-year statutory period under Rule 86A(3), and therefore deserved to be quashed on this additional ground as well. 2.4 Resultant directions Interpretation and reasoning: Having found the impugned blocking order unsustainable on all the above grounds, the Court directed that the electronic credit ledger be unblocked forthwith to enable the petitioner to file returns, while reserving liberty to the revenue authorities to proceed against the petitioner in accordance with law and in conformity with the principles laid down in K-9 Enterprises. Conclusions: The writ petition was allowed; the impugned order blocking the electronic credit ledger was quashed; and the respondents were directed to immediately unblock the ledger, subject to their right to initiate or continue proceedings in accordance with law and the binding Division Bench judgment.