Karnataka HC Unblocks Trader’s ₹43.89-Lakh GST Credit For Now, Says Three-Day Notice Was Inadequate Before Rule 86A Freeze

The petitioner challenged the blocking of input tax credit (ITC) of ₹43,89,637 in its Electronic Credit Ledger under Rule 86A of the KGST/CGST Rules, 2017.

The Joint Commissioner had issued a three-day notice before making the blocking order dated 28 August 2026.

The petitioner contended that it had not received a meaningful opportunity to submit and explain supporting documents.

The Revenue argued that the petitioner had failed to produce appropriate documents within the time allowed.

The petitioner relied on the Division Bench’s decision in K-9 Enterprises v. State of Karnataka.

Rule 86A of the KGST/CGST Rules, 2017 permits the competent authority, subject to the rule’s requirements, to restrict use of credit in an Electronic Credit Ledger.

In K-9 Enterprises v. State of Karnataka, (2024) 167 taxmann.com 499 (Karnataka), the Division Bench held that the requirements of Rule 86A must be satisfied and that a pre-decisional hearing is required before blocking credit.

The Court also relied on the principles of natural justice and Maneka Gandhi v. Union of India, 1978 AIR 597, under which administrative and quasi-judicial action must be fair, just and non-arbitrary.

The Court found that the impugned blocking order did not adhere to Rule 86A as interpreted in K-9 Enterprises.

Although the Revenue had issued a three-day notice, the Court held that this was insufficient, in the circumstances, to allow the petitioner to produce documents and substantiate its ITC claim.

It concluded that the opportunity provided did not amount to a meaningful hearing and that the impugned action failed to meet the applicable requirements of natural justice.

It further directed the petitioner to appear before the authority on 27 October 2026 and required the authority to provide an opportunity to produce documents and be heard before taking any further action under Rule 86A, in accordance with K-9 Enterprises.