Karnataka HC Quashes ITC Blocking as Rule 86A Action Was Taken Without Prior Notice

GVS Engineering And Construction Vs Assistant Commissioner of Commercial Taxes (Karnataka High Court)

The Karnataka High Court partly allowed a writ petition challenging proceedings dated 24.02.2026 under Rule 86A of the Central Goods and Services Tax Act, 2017, by which the respondent blocked the petitioner’s Input Tax Credit (ITC) of Rs.17,91,932. The ITC was blocked on the ground that M/s Ganesh Traders was allegedly a bill trader issuing fake invoices and that its business premises did not exist.

The petitioner contended that the respondent was required to issue a prior notice before blocking the ITC, relying on an earlier Division Bench decision holding that the requirement of notice must be read into the statutory scheme to ensure compliance with the principles of natural justice. The State did not dispute this legal position but argued that separate notices issued to the petitioner should continue independently.

The petitioner confined its challenge only to the proceedings blocking the ITC. Accepting this limited grievance, the High Court quashed the proceedings dated 24.02.2026 and directed the respondent to immediately unblock the petitioner’s electronic credit ledger upon receipt of the certified copy of the order. The Court clarified that the respondent was free to proceed against the petitioner in accordance with the procedure laid down by the Division Bench.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner has called in question the proceedings dated 24.02.2026 [Annexure-D] under Rule 86A of the Central Goods and Services Tax Act, 2017 [for short, ‘the Act’]. The respondent, under these proceedings, has blocked the Input Tax Credit [ITC] of Rs.17,91,932/- on the ground that M/s Ganesh Traders is found to be a Bill Trader involved in issuance of fake invoices and that this trader’s business premises is not in existence. The respondent’s Order blocking the ITC is after issuance of the Endorsement dated 04.02.2026.

Sri K M Shivayogiswamy, the learned counsel for the petitioner, submits that it was incumbent upon the respondent to issue notice in view of the decision of this Court in the Writ Appeal in W.A. No.100425/2023, wherein it is observed that Notice must be read into the statutory scheme to ensure there is no violation of the principles of natural justice. Sri K Hemakumar, the learned Additional Government Advocate, does not dispute this proposition, but he contends that this Court may not interfere with the Notices issued as per Annexures-B and B1 as it is independent and the petitioner must participate in the proceedings.

In response, Sri K M Shivayogiswamy submits that the petitioner confines the grievance to the proceedings dated 24.02.2026. On a careful consideration of all these circumstances and in view of the proposition that stands settled by this Court’s afore decision, there must be limited interference subject to terms. Hence, the following.

ORDER

(A) The petition is allowed in part, and the proceedings dated 24.02.2026 on the file of the respondent is quashed.

(B) The respondent is directed to unblock the petitioner’s electronic credit ledger immediately on receipt of a certified copy of this order.

(C) The respondent will be at liberty to proceed against the petitioner in accordance with the procedure required after the decision of the Division Bench in such proceedings.