ECrL blocking order cannot be passed without pre-decisional hearing: Karnataka HC

Safan Fasteners Vs Assistant Commissioner (Karnataka High Court)

The Karnataka High Court, in the case of Safan Fasteners vs. Assistant Commissioner, addressed the blocking of an Electronic Credit Ledger (ECrL) belonging to Safan Fasteners by the tax authorities. The petitioner challenged the blocking of an input tax credit amounting to $3,13,07,146/- from their ECrL, arguing that no pre-decisional hearing was provided, and the blocking order lacked sufficient reasons. The Court’s decision centered on the principles of natural justice, specifically the requirement of a pre-decisional hearing before taking actions with significant civil consequences. The Court referenced its previous ruling in K-9-Enterprises vs. State of Karnataka, which held that while Rule 86A of the Central Goods and Services Tax Rules, 2017, may not explicitly mandate a pre-decisional hearing, the principles of natural justice necessitate it. The Court reiterated that such drastic measures, like blocking an ECrL, which can severely impact a business, must be preceded by an opportunity for the affected party to present their case. The ruling also highlighted the importance of clear, cogent reasons for blocking the ECrL, emphasizing that a mere statement of the registered person being a “bill trader” or involved in “fake invoices” without detailed justification is insufficient. The Court specifically found that reliance on “borrowed satisfaction” from enforcement authority reports, without independent verification or reasoned application, is impermissible. Consequently, the Karnataka High Court quashed the impugned order that blocked Safan Fasteners’ ECrL. The Court directed the immediate unblocking of the ECrL to enable the petitioner to file their returns. However, the Court also granted liberty to the tax authorities to initiate fresh proceedings against Safan Fasteners, provided they do so in accordance with the law and adhere to the principles laid down in the K-9-Enterprises judgment, including providing a pre-decisional hearing and recording proper reasons. The petitioner was also directed to appear before the Assistant Commissioner for further proceedings.