An order to block ECrL cannot be passed without granting pre-decisional hearing

[Bimal jain]

The Hon’ble Karnataka High Court in M/S. SAFAN FASTENERS VERSUS ASSISTANT COMMISSIONER YW, ADMN STATE, THE COMMERCIAL TAX OFFICER (ENFORCEMENT) - 35, THE SUPERINTENDENT, RANGE-DND7, NORTH COMMISSIONERATE - 2025 (5) TMI 1430 - KARNATAKA HIGH COURT set aside the order, since no pre-decisional hearing was granted before passing the order and the order did not any contain independent or cogent reasons to believe, except placing reliance upon reports of enforcement authority, which was impermissible in law.

Facts:

Safan Fasteners’ (“the Petitioner”) Electronic Credit Ledger (“ECrL”) was blocked by an Order dated January 13, 2025 (“the Impugned Order”), invoking Rule 86A of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”).

The Petitioner contended that before passing the Impugned Order, pre-decisional hearing was not provided nor did the Impugned Order contain any reason to believe as to why it was necessary to block the ECrL. This act was in contravention to the decision of the Division Bench of Hon’ble Karnataka High Court in the case of K-9-ENTERPRISES, KWALITY METALS, K-9-INDUSTRIES VERSUS THE STATE OF KARNATAKA, THE ASSISTANT COMMISSIONER OF COMMERCIAL TAXES, BELAGAVI. - 2024 (10) TMI 491 - KARNATAKA HIGH COURT

Hence, aggrieved by the Impugned Order, the Petitioner filed the present writ petition.

Issue:

Whether an order to block ECrL be passed without granting pre-decisional hearing?

Held:

The Hon’ble Karnataka High Court in M/S. SAFAN FASTENERS VERSUS ASSISTANT COMMISSIONER YW, ADMN STATE, THE COMMERCIAL TAX OFFICER (ENFORCEMENT) - 35, THE SUPERINTENDENT, RANGE-DND7, NORTH COMMISSIONERATE - 2025 (5) TMI 1430 - KARNATAKA HIGH COURT held as under:

• Relied on, the K-9- Enterprises, wherein it was held as follows:

1. A plain reading of Rule 86A of the CGST Rules will indicate that there is absolutely no express provision for compliance with principles of natural justice, where pre-decisional hearing is required to be granted to the aggrieved. However, there could arise situations when principles of natural justice can be read into statutory provisions though they are not expressly present in the provisions.
2. In M/S SAHARA INDIA (FIRM), LUCKNOW VERSUS CIT, CENTRAL-I & ANR - 2008 (4) TMI 4 - SUPREME COURT the Apex Court held that before ordering special audit of the books of the assessee, the assessee was to be heard as that would entail civil consequences.
3. A post- decisional hearing is not a substitute for pre-decisional hearing and that pre-decisional hearing is important especially when the Revenue passed the impugned orders which would entail and visit the appellants with serious civil consequences.
4. The independent arrival of opinion that there was a reason to believe is not found forthcoming from the order issued blocking the said credit and it is entirely based on the satisfaction of another officer. It is quite possible that the transaction, when entered into in 2017 or 2018 could be genuine and when the officer visits in 2020 or 2021, the business could have been closed and therefore the mere closure of business in 2020 or 2021 cannot be a basis for denying credit availed earlier. All these factors required that the Revenue ought to have carefully considered and verified all aspects before taking such a drastic action of blocking credit under Rule 86A of the CGST Rule which is yet another circumstance that would vitiate the impugned order.
5. The Revenue committed a grave and serious infirmity in passing the impugned orders blocking the ECrL of the Appellants by invoking Rule 86A of the CGST Rules.

• Held that, in the view of the dictum of the K-9- Enterprises, in the instant case, since no pre-decisional hearing was provided before passing the Impugned Order, coupled with the fact that the Impugned Order invoked Rule 86A of the CGST Rule, blocking of the ECrL of the Petitioner does not contain independent or cogent reasons to believe by placing reliance upon reports of enforcement authority which is impermissible in law. Since the same is on borrowed satisfaction as held in K-9- Enterprises, the Impugned Order deserves to be quashed and ECrL shall be unblocked. It is also pertinent to note that the Impugned Order accept stating that the registered supplier "found to be a bill trader and involved in issuance/availment in fake invoices and the business premises is not existing", no other reasons were forthcoming in the Impugned Order. On this ground also, the Impugned Order was quashed.

Our Comments:

Rule 86A of the CGST Rules governs “Conditions of use of amount available in electronic credit ledger”. Further, it empowers the Commissioner or an authorized officer (not below the rank of Assistant Commissioner) to block the debit ITC from a taxpayer’s ECrL, if there is a reason to believe that the credit has been fraudulently availed or is ineligible. Paragraph 3.4 of the CBEC Circular No. 20/16/05/2021 – GST/1552 dated November 02, 2021 (“the Guidelines”) deals with the remedy available to taxpayers when their ITC is blocked or restricted under Rule 86A of the CGST Rules. Specifically, it provides that if the ECrL is blocked or debited under Rule 86A of the CGST Rules, the affected taxpayer has the right to seek a remedy by making a representation or appeal against the blocking or debit action.

In pari materia case, the Hon’ble High Court of Karnataka in the case of M/S. TRAVACORE MINERALS AND TRANSPORT COMPANY VERSUS STATE OF KARNATAKA, A COMMISSIONER OF COMMERCIAL TAXES (LGSTO 465) DAVANGERE - 2024 (11) TMI 460 - KARNATAKA HIGH COURT, quashed the order, where no pre-decisional hearing was provided by respondent-authorities before blocking ECrL and there was no independent or cogent reason to believe except reports of Enforcement authority, impugned blocking order was impermissible in law as same was based on borrowed satisfaction.

 (Author can be reached at [email protected])

Discussions to this article

[YAGAY andSUN]

Yes, the principle of natural justice is indeed eternal and foundational across all domains of law, including tax matters. It serves as a universal safeguard ensuring that legal and quasi-legal proceedings are fair, unbiased, and just, irrespective of the specific field or subject matter.

The principle of natural justice primarily rests on two cardinal rules:

1. Audi Alteram Partem – No one should be condemned unheard: Every individual must be given a fair opportunity to present their case, explain their position, and respond to any allegations or evidence against them.

2. Nemo Judex in Causa Sua – No one should be a judge in their own cause: Decision-makers must act without bias, conflict of interest, or preconceived notions.

In the context of taxation law, these principles are embedded both statutorily and judicially. Tax authorities are bound to issue show-cause notices, provide opportunities for personal hearings, and pass reasoned, speaking orders before finalising any adverse action. Indian courts, including the Supreme Court and various High Courts, have repeatedly emphasised that violation of natural justice renders the proceedings void or liable to be quashed, even if there is no explicit statutory requirement for such procedures.

To summarise, natural justice is not just a legal technicality—it is a fundamental requirement of fairness and procedural integrity, and it applies unconditionally, whether in taxation, civil, criminal, administrative, or any other branch of law. It protects the rights of individuals against arbitrary or prejudiced decision-making, and reinforces public confidence in the legal system.