Royal Steel Vs State of Karnataka (Karnataka High Court)
Quashes Electronic Credit Ledger Blocking Under Rule 86A for Lack of Pre-Decisional Hearing and Independent Reasons to Believe: Karnataka HC
The Karnataka High Court considered a writ petition challenging an order dated 06.01.2025 by which the petitioner’s Electronic Credit Ledger (ECL) was blocked under Rule 86A of the Central Goods and Services Tax Rules, 2017. The petitioner also sought a declaration that Rule 86A of the CGST/SGST Rules, 2017 was unreasonable, arbitrary, discriminatory and violative of Articles 14 and 19(1)(g) of the Constitution.
The petitioner contended that the impugned order was passed without granting a pre-decisional hearing and without recording any independent “reasons to believe” for blocking the Electronic Credit Ledger. It was submitted that the order relied upon reports of enforcement authorities and was contrary to the principles laid down by the Division Bench of the Karnataka High Court in K-9-Enterprises Vs. State of Karnataka.
The respondents supported the impugned order and sought dismissal of the petition.
The High Court examined the Division Bench judgment in K-9-Enterprises, which held that before invoking Rule 86A, the authorities must provide a pre-decisional hearing and satisfy the statutory requirement of forming “reasons to believe” based on their own independent inquiry. The Division Bench had observed that Rule 86A is an extraordinary power requiring strict compliance with statutory conditions, proper application of mind, and independent satisfaction rather than reliance on investigation reports or the conclusions of another officer. It also referred to the CBIC Circular dated 02.11.2021, which requires reasons to believe to be recorded in writing after considering the relevant facts and material evidence.
