Mohan Milkfoods Private Limited Vs Joint Commissioner (Corporate-2) State Tax And 2 Others (Allahabad High Court)
The Allahabad High Court considered a writ petition challenging an order dated 9 April 2026 by which the petitioner’s Input Tax Credit (ITC) available in the Electronic Credit Ledger (ECL) was blocked under Rule 86-A of the Uttar Pradesh GST Rules, 2017. The petitioner contended that the mandatory pre-condition for exercising powers under Rule 86-A had not been fulfilled because no “reason to believe” had been recorded in writing before blocking the ITC.
During the proceedings, the Court directed the revenue to clarify whether any written “reason to believe” had been recorded before passing the impugned order. In response, the revenue produced written instructions containing various reasons, including references to survey proceedings and reports, in support of the action taken. However, these reasons were not reflected in the impugned order itself.
The Court observed that the impugned order merely recorded the conclusion that the petitioner had fraudulently availed ITC without setting out the reasons forming the basis of such conclusion. It held that an order must stand on its own and cannot be supplemented by reasons subsequently furnished through written instructions or affidavits. Relying on the Supreme Court’s decision in Mohinder Singh Gill, the Court reiterated that the validity of a statutory order must be judged solely on the reasons contained in the order itself and not on explanations offered later.
The Court further examined the requirement of recording “reason to believe” under Rule 86-A by referring to an earlier coordinate Bench decision. It noted that recording such reasons in writing is a mandatory statutory requirement and not a procedural formality. Although the reasons may be recorded ex parte, the competent authority must apply its mind to the material available before exercising the power to block ITC. The existence of reasons is subject to judicial scrutiny, though the adequacy of those reasons is not.
The Court also referred to Supreme Court decisions explaining that “reason to believe” must have a rational basis supported by relevant material. The material relied upon must not be arbitrary, vague, irrational or irrelevant, and there must be a clear nexus between the material and the belief formed by the authority. The belief must be held in good faith and cannot be a mere pretence.
In the present case, the revenue relied upon an entry in the Electronic Credit Ledger stating “Supplier found non-functioning” and on an intimation received from the Directorate General of GST Intelligence (DGGI). The Court held that these did not satisfy the statutory requirement because they merely reflected a general conclusion without demonstrating any application of mind by the competent authority to the petitioner’s transactions. The DGGI communication referred generally to alleged fraudulent transactions by the supplier but did not specifically establish that the supplies made to the petitioner were bogus. Moreover, no order had been passed against either the supplier or the petitioner that could support such an inference.
The Court emphasised that when Rule 86-A requires “reasons to believe” to be recorded in writing, the authority must possess relevant material and record reasons demonstrating its own application of mind before blocking ITC. Since the action is taken ex parte against the taxpayer, strict compliance with this statutory safeguard becomes even more important. The Court also observed that maintaining the continuity of ITC is fundamental to the GST regime and that mere suspicion or doubt cannot justify blocking ITC without complying with the mandatory legal requirements.
Holding that no written “reason to believe” had been recorded before exercising powers under Rule 86-A, the Court concluded that the impugned order suffered from a jurisdictional defect. Accordingly, it set aside the order while granting liberty to the authority to pass a fresh order in accordance with law after complying with the statutory requirements. The writ petition was disposed of with these observations.
FULL TEXT OF THE JUDGMENT/ORDER OF ALLAHABAD HIGH COURT
