Top Stories No Blocking of GST ITC w/o ‘Reasons to Believe’ and Opportunity for Hearing: Karnataka HC [Read Order] The ruling reinforces that ITC blocking is a severe and exceptional measure, and it should not be done mechanically or without proper inquiry. By Manu Sharma – On October 14, 2024 3:14 pm – 2 mins read In a significant ruling, the Karnataka High Court has quashed the blocking of Input Tax Credit ( ITC ) by the tax authorities without providing a proper hearing or establishing concrete reasons.

The Input Tax Credit [ ITC ] of the petitioner was blocked by the impugned order at Annexure – A dated 09.07.2024, by invoking Rule 86A of the Central Goods and Services Tax Rules, 2017. The material on record pointed 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 ITC.

The petitioner challenged the order that blocked their ITC under Rule 86A of the Central Goods and Services Tax (CGST) Rules, 2017, citing violations of due process. Complete Draft Replies of GST ITC Related Notices, Click Here The petitioner argued that their ITC was blocked through an arbitrary order issued on July 9, 2024, without a pre-decisional hearing and without specific reasoning. The order simply cited the reports from enforcement authorities without an independent inquiry.

The High Court found that the impugned order lacked cogent reasoning, stating only that the registered person was “non-existent or not conducting business” at their registered premises. The court ruled this to be insufficient and indicative of a “borrowed satisfaction” from other officers, which is impermissible under the law. The Single Bench of Justice S.R. Krishna Kumar found that the tax authorities had failed to meet the two essential prerequisites under Rule 86A: first, the need for valid “reasons to believe” that the ITC was ineligible or fraudulently availed, and second, providing the taxpayer with a pre-decisional hearing. The court noted that in this case, both conditions were bypassed. Complete Draft Replies of GST ITC Related Notices, Click Here

Thus, the court held, was a violation of legal principles laid out in previous rulings, including the K-9 Enterprises v. State of Karnataka case, where the court had held that blocking ITC requires independent satisfaction by the assessing officer, not mere reliance on reports from other departments. The court emphasised the draconian nature of Rule 86A, which can severely impact businesses by restricting their ability to utilise tax credits.

Therefore, strict adherence to procedural safeguards and the presence of objective reasons are mandatory. As a result, the Karnataka High Court ordered the tax authorities to unblock the petitioner’s ITC immediately, allowing them to file returns and continue their business operations. Complete Draft Replies of GST ITC Related Notices, Click Here The court also granted the authorities liberty to initiate fresh proceedings in compliance with the law if required.