Case Law Details
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
1. Heard Sri Rakesh Ranjan Agarwal, learned Senior Advocate assisted by Sri Nitin Kumar Kesarwani, learned counsel for the petitioner and Sri Ankur Agarwal, learned Standing Counsel for the revenue.
2. Challenge has been raised to the order dated 09.04.2026 passed by respondent no.1, whereby the petitioner’s ITC (in ECL) has been blocked under Rule 86-A of the UP GST Rules, 2017 (hereinafter referred to as the ‘Rules’).
3. Submission is, the essential pre-condition for exercise of jurisdiction under Rule 86-A of the Rules, has not been fulfilled inasmuch as no “reason to believe” has been recorded, in writing before the extreme action to block the ITC (in ECL) of the petitioner, has been taken.
4. On such submission, we had required the learned Standing Counsel to obtain clear written instructions as to existence of “reason to believe”, in writing, as may have been recorded by respondent no.1 that may also form the basis of the order dated 09.04.2026.
5. Today, learned Standing Counsel has relied on written instructions received by him dated 25.05.2026. Copy of the same has been marked as ‘X’ and retained on record. On query made, learned Standing Counsel further states that the present writ petition may be decided on the strength of written instructions.
6. Accordingly, the matter has been heard.
7. Perusal of the written instructions reveal that in paragraph nos. 2, 3, 4, 6, 7, 8, 10 and other paragraphs, reasoning has been offered to support the order passed under Rule 86-A of the Rules. Thus, reference has been made to certain survey proceedings as also reports etc.
8. Without adverting to the merits of the reason now offered, it is undisputed that the impugned order does not contain recital of such reasons recorded therein.
9. To the extent, reasons are not found recorded in the impugned order dated 09.04.2026 and it only refers to conclusion drawn that the petitioner had fraudulently availed ITC, we find it difficult to accept the submissions being advanced by learned Standing Counsel that the impugned order is wholly reasoned.
10. It is fundamental to procedural law that an order may stand on its own strength and that it may not be supported by subsequent material, reasoning or affidavits. To that extent, the law firmly established, since the order of the Supreme Court in Mohinder Singh Gill & Anr. Vs. The Chief Election Commissioner, New Delhi & Ors.; (1978) 1 SCC 405 remains :
“8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out. We may here draw attention to the observations of Bose, J. in Gordhandas Bhanji [Commr. of Police, Bombay v. Gordhandas Bhanji, 1951 SCC 1088 : AIR 1952 SC 16] :
“Public orders, publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the actings and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself.”
Orders are not like old wine becoming better as they grow older.”
11. Therefore, while we recognise that respondent no.1 had jurisdiction to record reasons and thereafter block ITC (in ECL) of the petitioner, at present, we find, that power has been exercised without fulfilling the mandatory pre-condition to record “reason to believe”, in writing. As to what may constitute “reason to believe” in M/s Pilcon Infrastructure Pvt. Ltd. Vs. State of U.P. & Anr.; 2025:AHC:190271-DB, a coordinate bench has made the following observation :
“10. Primarily, no ‘reason to believe’ has been ‘recorded in writing’ by respondent no.2, to block the ITC of the petitioner. Once the Rule requires ‘reasons to believe’ to be ‘recorded in writing’, the jurisdiction and authority to be exercised under Rule 86A of the Rules must subscribe to that mandatory condition. Though such reasons may be recorded ex-parte against the assessee, at the same time, the requirement of the statute to record the reasons is a non-negotiable condition. It is wholly mandatory. As to what constitutes ‘reason to believe’ is not a matter of speculation, especially in this branch of law.
11. On that principle, in The Commissioner of Sales Tax, U.P. Vs M/S. Bhagwan Industries (P) Ltd., Lucknow (1973) 3 SCC 265, it was observed as under:
“11. ………. Question in the circumstances arises as to what is the import of the words “reason to believe”, as used in the section. In our opinion, these words convey that there must be some rational basis for the assessing authority to form the belief that the whole or any part of the turnover of a dealer has, for any reason, escaped assessment to tax for some year. If such a basis exists, the assessing authority can proceed in the manner laid down in the section. To put it differently, if there are, in fact, some reasonable grounds for the assessing authority to believe that the whole or any part of the turnover of a dealer has escaped assessment, it can take action under the section. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction to take action under the section. Whether the grounds are adequate or not is not a matter which would be gone into by the High Court or this Court; for the sufficiency of the grounds which induced the assessing authority to act is not a justiciable issue. What can be challenged is the existence of the belief but not the sufficiency of reasons for the belief. At the same time, it is necessary to observe that the belief must be held in good faith and should not be a mere pretence.”
12. As to the material that may give rise to a “reason to believe” that any part of the turnover of an assessee escaped assessment to tax, the Supreme Court in the case of State of Uttar Pradesh And Others Vs. Aryaverth Chawal Udyog & Others (2015) 17 SCC 324 has observed in paragraph nos.28 and 30, thus:
“28. This Court has consistently held that such material on which the assessing authority bases its opinion must not be arbitrary, irrational, vague, distant or irrelevant. It must bring home the appropriate rationale of action taken by the assessing authority in pursuance of such belief. In case of absence of such material, this Court in clear terms has held the action taken by the assessing authority on such “”reason to believe”” as arbitrary and bad in law. In case of the same material being present before the assessing authority during both, the assessment proceedings and the issuance of notice for reassessment proceedings, it cannot be said by the assessing authority that “”reason to believe”” for initiating reassessment is an error discovered in the earlier view taken by it during original assessment proceedings. (See Delhi Cloth and General Mills Co. Ltd. v. State of Rajasthan [Delhi Cloth and General Mills Co. Ltd. v. State of Rajasthan, (1980) 4 SCC 71 : 1980 SCC (Tax) 348] .
30. In case of there being a change of opinion, there must necessarily be a nexus that requires to be established between the “change of opinion” and the material present before the assessing authority. Discovery of an inadvertent mistake or non-application of mind during assessment would not be a justified ground to reinitiate proceedings under Section 21(1) of the Act on the basis of change in subjective opinion (CIT v. Dinesh Chandra H. Shah [CIT v. Dinesh Chandra H. Shah, (1972) 3 SCC 231] ; CIT v. Nawab Mir Barkat Ali Khan Bahadur [CIT v. Nawab Mir Barkat Ali Khan Bahadur, (1975) 4 SCC 360 : 1975 SCC (Tax) 316]).”
13. Reliance placed by learned Standing Counsel on the ‘Reason’ as mentioned in the Electronic Credit Ledger, namely, “Supplier found nonfunctioning”, does not fulfill the requirement of Rule 86A(1) of the Rules, to the extent it does not reflect any application of mind to reach that conclusion. Though it may be true that the respondent no.2 had received intimation dated 13.06.2025 from the DGGI, Raipur Zonal Unit, perusal of that communication (as extracted above) only reflects a generic/non-specific conclusion drawn by that authority. Thus, the said communication reflects a conclusion that a supplier – M/s Maa Kamakhaya Trading, Sarguja has passed on fraudulent ITC without supplying any goods, on the basis of bogus invoices, etc. That the goods claimed to have been supplied to the petitioner by the said supplier M/s Maa Kamakhaya Trading, Sarguja was a bogus transaction, may not be readily inferred, merely on the generic allegation made by DGGI, Raipur Zonal Unit that that dealer had made some non-generic transactions.
14. Clearly, the investigation by DGGI, Raipur Zonal Unit, would be ex-parte against the petitioner. In any case, no order appears to have been passed in the case of M/s Maa Kamakhaya Trading, Sarguja, or the present petitioner as may support the inference drawn by respondent no.2, that the said supplier had reflected bogus transactions in favour of the petitioner.
15. When the Rules require recording of ‘reasons to believe’, ‘in writing’, there must not only exist material that may give rise to the belief necessary to be recorded by respondent.2 but the reasons must spring from material on record/leading to the necessary belief. It necessarily involves application of mind by the competent authority, here respondent no.2, to the facts brought before it.
16. Even though exercise of power under Rule 86A(1) of the Rules remained ex-parte to the assessee, yet, more especially for that reason, the requirement of the statute to first record ‘reasons to believe’, ‘in writing’ must be strictly enforced on the revenue authorities.
17. It may not forgotten, granting ITC and maintaining its chain is the soul of a successful GST regime. Therefore, any doubt or suspicion alone may not lead an action by the authorities to block the ITC of the assessee and disrupt the entire value addition chain and consequentially tax payments without fulfilling the mandatory requirement of law – to record ‘reasons to believe’, ‘in writing’.”
12. Accordingly, the impugned order is found to be jurisdictionally deficient, since no “reason to believe” (required to be recorded, in writing before exercise of power under Rule 86-A of the Rules), has been recorded. It is accordingly set aside. However, liberty is granted to respondent no.1 to pass a fresh order, strictly in accordance with law.
13. With the aforesaid observation, present writ petition stands disposed of.
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