The Karnataka High Court has set aside an order blocking input tax credit (ITC) of ₹43.89 lakh under Rule 86A of the GST Rules, holding that a three-day notice did not provide the taxpayer sufficient opportunity to produce documents and substantiate its claim.

The bench of Justice T.M. Nadaf, sitting at the Dharwad Bench, directed the tax authorities to unblock the credit and provide an appropriate opportunity to submit transaction records and be heard before taking any fresh action in accordance with law.

Buy Now: 160+ GST E-Magazine September 2026

The Court emphasised that the principles of natural justice are an essential foundation of fair administrative decision-making and cannot be reduced to a procedural formality.

The petition arose from the blocking of ₹43,89,637 available in the electronic credit ledger of a Belagavi-based trading concern. The revenue authorities invoked Rule 86A of the Karnataka Goods and Services Tax/Central Goods and Services Tax Rules, 2017.

The taxpayer challenged the blocking order dated August 28, 2026, along with related endorsements, alleging that the authorities had acted arbitrarily and failed to provide a meaningful opportunity of hearing.

The petition contended that the action violated the principles of natural justice, the requirements governing the exercise of powers under Rule 86A, and constitutional protections under Articles 14, 19(1)(g) and 21.

Appearing for the taxpayer, counsel Ganesh Shandage relied on the Karnataka High Court’s Division Bench judgment in K-9 Enterprises v. State of Karnataka.

The taxpayer submitted that blocking credit under Rule 86A carries serious civil consequences and therefore requires a pre-decisional hearing.

Although the authorities had issued a hearing notice, the taxpayer argued that the documents produced had not been considered and that it had not received an effective opportunity to explain its position.

The submission was that merely issuing a notice could not satisfy the requirement of natural justice when the opportunity to produce supporting records and make submissions was inadequate.

The department submitted that the taxpayer had been given three days to furnish documents.

According to the department, the taxpayer failed to produce appropriate documents supporting its claim before the blocking order was passed. On that basis, the authorities defended the order and opposed interference by the Court.

The government advocate also informed the Court that the appropriate authority had instructed the State revenue administration to follow the Division Bench ruling in K-9 Enterprises to avoid repeated litigation on the issue.

After examining the impugned order, the High Court held that the authorities had failed to comply with the requirements explained in K-9 Enterprises.

The Court rejected the contention that the three-day notice constituted sufficient opportunity in the circumstances. It observed that the taxpayer needed an adequate opportunity to produce documents and substantiate its claim.

The ruling therefore turned on the effectiveness of the opportunity afforded to the taxpayer, rather than the mere fact that a notice had been issued.

The Court did not prescribe a uniform minimum notice period for every proceeding under Rule 86A. Its finding was that the three-day period provided in this case was insufficient for the production of documents and substantiation of the ITC claim.

The High Court stressed that natural justice forms the foundation of fairness, equity and the rule of law in administrative and judicial decision-making.

It also connected the requirement of fair procedure with the fundamental rights protected by Articles 14 and 21 of the Constitution.

Referring to the Supreme Court’s decision in Maneka Gandhi v. Union of India, the Court reiterated that administrative and quasi-judicial action must satisfy standards of fairness and must not be arbitrary or oppressive.

In this context, the Court held that an inadequate opportunity to present records and explain the relevant transactions could not sustain the credit-blocking action.

The judgment reproduced the Division Bench’s observations in K-9 Enterprises concerning the conditions governing the exercise of powers under Rule 86A.

Those observations addressed the need for valid and sufficient material constituting “reasons to believe” and compliance with the statutory prerequisites before blocking an electronic credit ledger. The Division Bench had also disapproved reliance on another officer’s borrowed satisfaction in the circumstances before it.

In the present case, the High Court applied that precedent while examining the adequacy of the hearing and the legality of the impugned blocking order.

The High Court quashed the August 28, 2026 order and the further actions contemplated thereafter. It expressly set aside the ITC-blocking action and directed the authorities to unblock the credit.

The Court further directed the concerned authority to provide an appropriate opportunity to the taxpayer to place records relating to the transactions on which ITC had been claimed.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: 14 GST Changes From 1 November 2026