Shah Associates Vs Assistant Commissioner of Commercial Taxes (Karnataka High Court)
SEO Title: Karnataka HC: Rule 86A ITC Blocking Continues Pending Fresh Opportunity to Establish Genuine Transactions
Summary: Karnataka High Court partly allowed Shah Associates’ writ petition concerning blocking of Input Tax Credit under Rule 86A of the CGST/KGST Rules, 2017, giving the petitioner an opportunity to produce documents establishing the genuineness of transactions but declining to automatically unblock the ITC. Shah Associates, a proprietary concern engaged in the business of cement and iron, challenged the order dated 23.02.2026 by which ITC in its Electronic Credit Ledger had been blocked. The writ petition sought, inter alia, unblocking of ITC amounting to Rs.16,45,594/-, comprising Rs.8,22,797/- CGST and Rs.8,22,797/- KGST. The petitioner argued that it had not received a reasonable pre-decisional opportunity to show cause.
The High Court rejected the factual basis of the petitioner’s contention that no opportunity had been extended before blocking the credit. The State produced an intimation of personal hearing dated 30.01.2026 together with a postal acknowledgement signed on behalf of the petitioner. The Court held that these documents completely undermined the contention that an opportunity had not been provided. The blocking action was based on the allegation that ITC had been claimed solely on documents received from certain fictitious entities and that blocking was necessary to secure revenue and prevent violation.
However, the petitioner specifically asserted that M/s Excel Trading, described by the authority as a fictitious entity, was a registered dealer and that the transactions were supported by valid invoices and payments through proper banking channels. The Court considered these assertions sufficient to justify a further opportunity to show cause. It observed that if the petitioner produced documents establishing the genuineness of the transaction with M/s Excel Trading, the authority should dissolve the blocking decision. At the same time, the Court categorically held that granting such an opportunity could not by itself result in automatic unblocking of the ITC.
The petition was therefore allowed in part. Shah Associates was granted liberty to file a detailed response with supporting documents against the blocking decision dated 23.02.2026. The first respondent was directed to consider that response, provide an opportunity to the petitioner and determine whether blocking of the ITC should continue. The petitioner was directed to submit its response before 30.09.2026, and the authority was directed to decide continuation of the blocking by 31.10.2026.
FULL TEXT OF THE KARNATAKA HIGH COURT ORDER
The petitioner, a proprietary concern, engaged in the business of cement and iron is aggrieved by the first respondent’s order dated 23.02.2026 [Annexure-A] and the first respondent, in exercise of the powers under Rule 86A of the Central Goods and Service Tax/Karnataka Goods and Service Tax Rules,2017 [CGST/KGST Rules], has blocked the petitioner’s Input Tax Credit [ITC] in its Electronic Credit Ledger.
2. Sri. Gowri Shanker, the learned counsel for the petitioner, and Ms. Jyoti M Maradi, the learned High Court Government Pleader, who accepts notice for the respondents, are heard for the disposal of the petition with Sri. Gowri Shanker contending that the petitioner has not had a reasonable opportunity to show cause against the decision to block ITC, asserting that the petitioner was entitled to a pre-decisional opportunity.
3. The first respondent has blocked ITC for the petitioner on the premise that the petitioner is claiming ITC based solely on the strength of the documents received from certain fictitious entities and ITC must be blocked to secure revenue and to prevent violation. Though it is contended on behalf of the petitioner that no pre-decisional opportunity was extended, Ms. Jyoti M Maradi, places on record a copy of the intimation of personal hearing dated 30.01.2026 and a copy of the postal acknowledgement signed on behalf of the petitioner acknowledging the receipt of such intimation. This completely undermines the petitioner’s case that it was not extended an opportunity.
4. However, the petitioner contends that M/s Excel Trading, which is described as a fictitious entity by the first respondent, is a registered dealer and that its transactions with this entity are under valid invoices and the genuineness of the transaction can be demonstrated with the assistance of payments made to the entity through proper banking channels. These assertions persuade this Court to conclude that the petitioner must have an opportunity to show cause against the decision to block its ITC and to observe that the first respondent, if the petitioner can indeed produce documents to establish the genuineness of the transaction with M/s Excel Trading, should dissolve the decision. This Court is of the categorical view that this Court’s intervention to extend an opportunity cannot automatically unblock the ITC. Hence, the following.
ORDER
[A] The petition is allowed in-part.
[B] The petitioner is reserved with liberty to file a detailed response along with documents to show cause against the first respondent’s decision to block ITC in terms of the decision dated 23.02.2026.
[C] The first respondent is directed to consider such response, and extend an opportunity to the petitioner, to decide on whether the decision to block the petitioner’s ITC must continue.
[D] The petitioner shall file such response before 30.09.2026 and the first respondent shall decide on the continuation of the blocking of the ITC by 31.10.2026.
