R. 86A Can Be Invoked Only Where Assessee Fraudulently Avails Ineligible ITC and Not Against Goods Recipient: Karnataka HC

The Karnataka High Court has held that Rule 86A of the CGST Rules can be invoked only where the assessee itself has fraudulently availed or is ineligible for Input Tax Credit (ITC) and not when the recipient of goods had wrongly availed ITC. The bench of Justice Sunil Dutt Yadav has observed that invoking Rule 86A against the Petitioner was without jurisdiction, quashed the SCN and directed the authorities to unblock the Petitioner’s electronic credit ledger forthwith. The petitioner firm approached the High Court seeking quashing of the show-cause notice and restoration of its blocked ITC. According to the petitioner, the department alleged that goods were supplied to a buyer, M/s. Million Lights, through invoices without actual movement of goods, thereby facilitating fraudulent ITC. The tax authorities had initiated action under Rule 86A, which empowers GST officials to block the utilization of ITC in the electronic credit ledger if they have reasons to believe that such credit has been fraudulently availed or is otherwise ineligible. The petitioner, however, contended that the provision could only be invoked when the taxpayer whose ITC is blocked has wrongfully availed credit. In the present case, the allegation related to the recipient of goods—Million Lights—who was allegedly claiming fraudulent ITC. The petitioner further argued that it had already paid output tax on the transactions and therefore its ITC could not be restricted under Rule 86A merely because of allegations against the buyer. The department submitted that investigations were underway regarding the alleged wrongful availment of ITC by the buyer. The government also pointed out that statements from the partner of the petitioner firm suggested that invoices might have been issued without actual supply of goods. The department contended that the matter involved questions of fact and law and required adjudication through the statutory process. The bench of Justice S. Sunil Dutt Yadav examined the scope of Rule 86A, which allows the Commissioner or an authorized officer to block the utilization of ITC if there are reasons to believe that such credit has been fraudulently availed. The provision specifically applies where ITC is availed: on invoices issued by a non-existent supplier, without receipt of goods or services, where tax charged has not been paid to the government, or where the taxpayer availing credit does not possess valid documents. The Court emphasized that the power under Rule 86A is meant to restrict utilization of ITC when the credit has been fraudulently availed by the taxpayer whose ledger is blocked. In the present case, the allegation in the notice related to the wrongful availment of ITC by the recipient of the goods, namely Million Lights, and not by the petitioner. The Court held that Rule 86A can only be invoked when the taxpayer whose electronic credit ledger is blocked has fraudulently availed or is ineligible for ITC. Allegations against a buyer claiming fraudulent ITC cannot justify blocking the supplier’s credit under the rule. The show-cause notice itself indicated that the alleged wrongful ITC was availed by the buyer and not by the petitioner. Since the statutory conditions for invoking Rule 86A were not satisfied, the Court concluded that the action of the department was without jurisdiction. The High Court quashed the impugned show-cause notice and directed that the petitioner’s electronic credit ledger be unblocked forthwith. The Court clarified that its observations were limited to the legality of invoking Rule 86A in the present case and would not prevent authorities from taking action under other applicable provisions of the GST law if warranted. Case Details Case Title: Sri Padmawati Marketing Versus Assistant Commissioner of Commercial Tax Citation: JURISHOUR-355-HC-2026(KAR) Case No.: WP No. 373 of 2026 Date: 04/03/2026 Counsel For Petitioner: Lochana S. Babu Counsel For Respondent: K. Hemakumar Click Here To Read Order Read More: No Service Tax on BCCI Subsidies to Cricket Association of Bengal: CESTAT

R. 86A Can Be Invoked Only Where Assessee Fraudulently Avails Ineligible ITC and Not Against Goods Recipient: Karnataka HC

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