Karnataka HC Mandates Pre-Decisional Hearing and Independent Reasoning for Blocking ECL under Rule 86A
In a significant ruling concerning the procedural safeguards available to an assessee under the Goods and Services Tax (GST) regime, the Karnataka High Court has reinforced the principles of natural justice regarding the blocking of the Electronic Credit Ledger (ECL). The High Court, in the matter of RDTMT Steels (India) Private Limited Vs Assistant Commissioner of Commercial Tax, declared that revenue authorities cannot invoke Rule 86A of the Central Goods and Services Tax Rules, 2017 (CGST Rules) to block Input Tax Credit (ITC) without affording a pre-decisional hearing and recording independent "reasons to believe."
This judgment serves as a critical check on the powers of the tax department, emphasizing that the restriction of ITC is a severe measure that must not be exercised mechanically or based solely on "borrowed satisfaction" from external investigation reports.
The Core Dispute
The writ petition was filed by the assessee challenging the actions of the Assistant Commissioner of Commercial Tax. The primary grievance arose from an order dated 19.11.2025, wherein the revenue authority blocked the assessee's ECL, thereby restricting the utilization of ITC amounting to approximately Rs. 12.26 Crore.
The assessee contended that this drastic action was taken in violation of the principles of natural justice. Specifically, the assessee argued that:
- No opportunity for a hearing was provided prior to the blocking of the credit (pre-decisional hearing).
- The impugned order failed to disclose valid "reasons to believe" as required under the statutory provisions.
- The decision was based entirely on a communication from an enforcement authority rather than the proper officer's independent application of mind.
Legal Framework: Rule 86A of CGST Rules
Rule 86A of the CGST Rules empowers the Commissioner or an authorized officer to disallow the debit of an amount equivalent to such credit in the ECL if they have "reasons to believe" that the credit has been fraudulently availed or is ineligible.
The grounds for such belief typically include:
- The supplier is found to be non-existent.
- Tax has not been paid to the government.
- The assessee is not in possession of a valid tax invoice.
However, the interpretation of "reasons to believe" and the procedural necessity of a hearing have been subjects of intense judicial scrutiny. The courts have consistently held that this power is not unbridled and must be exercised with caution to prevent undue hardship to legitimate businesses.