The Allahabad High Court has quashed an order blocking a taxpayer’s Input Tax Credit (ITC) under Rule 86A of the Uttar Pradesh GST Rules, 2017, holding that the mandatory statutory requirement of recording “reason to believe” in writing before exercising such power had not been fulfilled.
The bench of Justice Saumitra Dayal Singh and Justice Vivek Saran ruled that subsequent explanations or written instructions cannot cure a jurisdictional defect in the original order and permitted the tax authorities to pass a fresh order strictly in accordance with law.
The Bench reiterated the settled principle laid down by the Supreme Court in Mohinder Singh Gill v. Chief Election Commissioner, observing that the validity of an administrative order must be judged solely on the reasons recorded in that order and cannot later be supplemented through affidavits or written instructions.
The petitioner/assessee challenged an order dated 9 April 2026 issued by the Joint Commissioner (Corporate-2), State Tax, whereby the petitioner’s ITC available in its Electronic Credit Ledger (ECL) was blocked under Rule 86A of the Uttar Pradesh GST Rules, 2017.
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The petitioner contended that the statutory pre-condition for invoking Rule 86A had not been satisfied since no “reason to believe” had been recorded in writing before blocking its ITC. According to the petitioner, the order merely recorded a conclusion that ITC had been fraudulently availed without disclosing the reasons that led to such conclusion.
During the hearing, the State produced written instructions dated 25 May 2026, which referred to survey proceedings, reports, and other material allegedly supporting the decision to block ITC. The Revenue argued that these documents justified the exercise of power under Rule 86A.
However, the Division Bench observed that these reasons were never reflected in the impugned order itself.
The Court noted that although the authorities had attempted to explain the basis of their action during litigation, the original order merely stated the conclusion that fraudulent ITC had been availed without recording the reasons that formed such belief. Consequently, the order could not be sustained.
The High Court emphasized that Rule 86A expressly requires the competent authority to first record its “reason to believe” in writing before blocking a taxpayer’s electronic credit ledger.
Referring to its earlier decision in M/s Pilcon Infrastructure Pvt. Ltd. v. State of U.P., the Court observed that recording such reasons is not a procedural formality but a mandatory jurisdictional condition. While the reasons may be recorded ex parte, they must demonstrate application of mind based on relevant material available on record.
The Bench further relied upon the Supreme Court decisions in: Commissioner of Sales Tax v. Bhagwan Industries (P) Ltd., explaining that “reason to believe” requires a rational nexus between available material and the belief formed by the authority. State of Uttar Pradesh v. Aryaverth Chawal Udyog, which held that such belief cannot rest on arbitrary, vague or irrelevant material.
One of the principal grounds relied upon by the department was an entry in the Electronic Credit Ledger stating that the petitioner’s supplier had been found “non-functioning.”
The Court held that this vague observation failed to disclose any application of mind by the tax authority. The department had also relied upon a communication from the Directorate General of GST Intelligence (DGGI), Raipur Zonal Unit, alleging that one supplier had passed fraudulent ITC through bogus invoices.
However, the Bench found that the DGGI communication merely contained generic allegations and did not specifically establish that the transactions between the petitioner and the supplier were bogus. Nor had any adjudication or order been passed against either the supplier or the petitioner that could justify the drastic action of blocking ITC.
The High Court made significant observations regarding the importance of the ITC mechanism under the GST regime.
It stated that the uninterrupted flow of input tax credit forms the foundation of the GST system and any disruption in that chain has serious consequences for businesses and tax collection alike.
Accordingly, the Court observed that mere suspicion or doubt cannot justify blocking ITC. Before exercising such extraordinary powers under Rule 86A, authorities must strictly comply with the statutory requirement of recording “reasons to believe” in writing after proper application of mind to the available material.
Holding that the mandatory jurisdictional requirement had not been complied with, the Allahabad High Court declared the impugned order legally unsustainable and set it aside.
At the same time, the Court granted liberty to the competent authority to pass a fresh order in accordance with law after satisfying the statutory requirements prescribed under Rule 86A.
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