Karnataka HC Quashed Rule 86A Action as ITC Not Availed by Assessee but by Customer

Sri Padmavathi Marketing Vs Assistant Commissioner of Commercial Taxes (Karnataka High Court)

The petitioner challenged a show-cause notice dated 10.11.2025 issued under Rule 86A of the CGST/KGST Rules, 2017, and sought directions to unblock Input Tax Credit (ITC) amounting to ₹1,96,58,274/- in its Electronic Credit Ledger.

The show-cause notice alleged that the petitioner had supplied goods to M/s. Million Lights by passing on fraudulent ITC without actual supply of goods and called upon the petitioner to explain why such transactions should not be treated as irregular and why action under Rule 86A should not be taken.

The petitioner contended that Rule 86A could only be invoked where the assessee had fraudulently availed ITC and not where the allegation concerned wrongful availment of ITC by the customer. It was submitted that in the transactions with M/s. Million Lights, the petitioner had paid output tax, and therefore the provision could not be applied.

The respondent submitted that the department was investigating wrongful ITC availment by M/s. Million Lights and asserted that the petitioner’s partner had made admissions regarding issuance of invoices without actual supply of goods. However, the petitioner denied these allegations and maintained that even if such facts were proved, Rule 86A could not be invoked against it.