Royal Steel Vs State of Karnataka (Karnataka High Court)
The Karnataka High Court considered a writ petition challenging an order dated 06.05.2024 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 before passing the impugned order, no pre-decisional hearing had been granted and the order did not record any independent “reasons to believe” justifying the blocking of the Electronic Credit Ledger. The petitioner relied upon the Division Bench judgment of the Karnataka High Court in K-9-Enterprises Vs. State of Karnataka and connected matters to contend that the impugned order was liable to be quashed. The respondents supported the impugned order and sought dismissal of the petition.
The Court referred extensively to the Division Bench decision in K-9-Enterprises Vs. State of Karnataka, which held that before exercising powers under Rule 86A, a pre-decisional hearing is required and the authority must independently record “reasons to believe” based on objective material. The Division Bench held that Rule 86A is a drastic provision requiring strict compliance with its statutory conditions. It further held that blocking an Electronic Credit Ledger cannot be based merely on investigation reports or communications from another officer without independent application of mind. According to that judgment, “reasons to believe” cannot rest on borrowed satisfaction, and the competent authority must undertake its own inquiry and objectively assess the material before invoking Rule 86A. The Division Bench also referred to the CBIC Circular dated 02.11.2021, which requires proper application of mind, objective evaluation, recording of reasons in writing, and careful examination before exercising powers under Rule 86A.
