Karnataka High Court Clarifies: Blocked ITC Under Rule 86A Not Revoked Automatically; Fresh Opportunity Mandatory

Background of the Dispute

In Shah Associates Vs Assistant Commissioner of Commercial Taxes (Karnataka High Court), the Karnataka High Court examined the legality of blocking Input Tax Credit (ITC) under Rule 86A of the CGST/KGST Rules, 2017. The case centred around whether ITC that had been blocked in the Electronic Credit Ledger could be unblocked automatically merely because the Court granted the assessee another opportunity to establish the genuineness of its transactions.

The assessee, Shah Associates, a proprietary concern engaged in trading of cement and iron, challenged an order dated 23.02.2026 passed by the first respondent. By this order, the authority had invoked Rule 86A of the Central Goods and Service Tax/Karnataka Goods and Service Tax Rules, 2017 and blocked the ITC available in the assessee’s Electronic Credit Ledger.

The writ petition sought, amongst other reliefs, a direction to unblock ITC amounting to Rs. 16,45,594/-, comprising:

  • Rs. 8,22,797/- CGST
  • Rs. 8,22,797/- KGST

The core issues before the Court were:

  • Whether there was a violation of the principles of natural justice in blocking ITC under Rule 86A.
  • Whether ITC, once blocked under Rule 86A, could be ordered to be unblocked automatically by the Court while granting an opportunity to the assessee to establish genuineness of transactions.
  • What process the authority must follow once the assessee asserts that its supplier is a genuine registered dealer, and offers to furnish documentary proof.

Assessee’s Contentions

The assessee argued that:

  • The order dated 23.02.2026 blocking ITC in the Electronic Credit Ledger was passed without providing a fair pre-decisional opportunity to show cause.
  • It was entitled to a reasonable hearing before the drastic measure of blocking ITC under Rule 86A was taken.
  • The authority had alleged that the ITC was availed solely on the basis of documents issued by fictitious entities, but this allegation was disputed.

A key factual assertion by the assessee related to one of the suppliers:

  • The first respondent had treated M/s Excel Trading as a fictitious entity.
  • The assessee specifically contended that M/s Excel Trading was in fact a registered dealer under GST.
  • It was further pleaded that supplies from M/s Excel Trading were supported by:
    • Valid tax invoices, and
    • Payments made through recognised banking channels.
  • On this basis, the assessee insisted that the underlying transactions were genuine and could be fully substantiated through proper documentation.

Based on these submissions, the assessee requested:

  1. Setting aside of the blocking order dated 23.02.2026; and
  2. Immediate unblocking of the ITC of Rs. 16,45,594/- in its Electronic Credit Ledger; or at the minimum,