Bombay High Court: ITC Blocking Cannot Be Collective — Each Case Demands Independent Adjudication
Case Reference
Karan Agencies Vs State of Maharashtra (Bombay High Court)
Background and Context
A consolidated batch of writ petitions came up before the Bombay High Court, all revolving around a common thread — show cause notices and pre-intimation notices issued by GST authorities proposing adverse action, most critically the blocking of Input Tax Credit (ITC). Since the petitions shared overlapping questions of fact and law, the Court disposed of all of them through a single common order.
The department's grievance, across the various petitions, centred on allegations that the assessees had fraudulently claimed ITC. The specific allegations included:
- Procurement of goods or services from unregistered or non-existent suppliers
- Availment of ITC based on bogus or fabricated invoices
- Claims made without actual movement of goods or services underlying the transactions
Beyond challenging the blocking of ITC, the assessees mounted a broader legal challenge — attacking the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act).
Key Legal Issues Before the Court
1. Validity of ITC Blocking Action
The assessees argued that the blocking of ITC by tax authorities had a direct and severe impact on their ability to carry on business. They contended that such action, without proper adjudication, was disproportionate and unjustified.
2. Constitutional Challenge to Section 16(2)(c) of the CGST Act
The assessees urged that Section 16(2)(c) of the CGST Act places an unreasonable and disproportionate burden on recipients of goods or services. Their argument was that the provision effectively makes the recipient liable for the default of the supplier — a situation entirely beyond the recipient's control — thereby rendering the section:
- Arbitrary and irrational
- Violative of Article 14 (Right to Equality) of the Constitution of India
- Violative of Article 19(1)(g) (Right to Carry on Trade or Business) of the Constitution of India
- In conflict with Article 300A (Right to Property) of the Constitution of India
3. Show Cause Notices and Pre-Intimation Notices
The assessees also challenged the legality and manner of issuance of show cause notices and pre-show cause intimation notices, seeking judicial intervention at the notice stage itself.