K-9-Enterprises Vs State of Karnataka (Karnataka High Court)
GST Credit Blocking Invalid Because Authorities Relied on Borrowed Satisfaction; Rule 86A Requires Independent Reasons to Believe Before Blocking ITC; Blocking Electronic Credit Ledger Without Prior Notice was Illegal; Karnataka HC Rules Post-Decisional Hearing Not a Substitute for Prior Hearing in GST ITC Cases.
The Karnataka High Court heard intra-court appeals challenging a common order dated 27.07.2023 passed in connected writ petitions concerning blockage of Electronic Credit Ledgers (ECL) under Rule 86A of the Central Goods and Services Tax Rules, 2017. The appellants were GST-registered dealers engaged in the business of lead, lead scrap, and related activities. They had availed input tax credit (ITC) on purchases from GST-registered dealers, and such ITC was reflected in their Electronic Credit Ledgers. By orders dated 27.06.2023, the revenue authorities blocked the ECLs by invoking Rule 86A, leading to the filing of writ petitions.
The appellants contended that Rule 86A is a drastic provision and can only be invoked upon strict compliance with statutory conditions. It was argued that the authorities were required to provide a pre-decisional hearing before blocking the ECLs and that a post-decisional hearing could not substitute such prior opportunity except in extraordinary situations. The appellants further submitted that the authorities had acted mechanically and solely on the basis of a field visit report from another officer at Vasco-Da-Gama, Goa, without independent application of mind or verification of the genuineness of transactions. According to the appellants, the action was based on “borrowed satisfaction” rather than objective material establishing fraudulent or ineligible ITC.
