The Karnataka High Court has directed the GST authorities to immediately unblock Input Tax Credit (ITC) amounting to ₹3.81 lakh, holding that the credit was blocked without prior intimation or an opportunity of hearing being granted to the taxpayer.
The bench of Justice B.M. Shyam Prasad observed that interference by the Court was warranted because the State GST authority could not dispute that the taxpayer had neither been informed about the proposed blocking of credit nor provided a pre-decisional hearing.
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The Court, however, clarified that the order unblocking the credit would not prevent the authorities from initiating fresh proceedings in accordance with law after issuing an intimation and giving the taxpayer an opportunity to present its case.
The petitioner/assessee is a limited liability partnership engaged in providing construction services to various industrial establishments. The petitioner approached the High Court after ITC worth ₹3,81,407 was blocked in its electronic credit ledger. Screenshots of the GST portal were placed before the Court to demonstrate the blocking of credit.
According to the petitioner, the action was taken without issuing any notice or intimation and without providing an opportunity of hearing. It sought a direction to the Assistant Commissioner of Commercial Taxes to unblock and restore the amount in its electronic credit ledger.
The petitioner also sought a declaration that the blocking of ITC was contrary to the GST laws and rules, arbitrary, and violative of Articles 14, 19(1)(g) and 265 of the Constitution.
Appearing for the State GST authority, the High Court Government Pleader did not dispute that no intimation regarding the proposed ITC blocking had been issued to the petitioner. It was also undisputed that the petitioner had not been granted a pre-decisional hearing.
The Department, however, placed before the Court a communication issued by the Central GST authorities. It was submitted that the petitioner had been identified as one of the entities that allegedly received services from a non-existent supplier.
On this basis, the authorities contended that appropriate action was required to ensure that neither the supplier nor the recipients obtained the benefit of ineligible ITC.
After examining the Central GST communication, the High Court observed that it merely required appropriate action to be taken after verification.
The communication, therefore, could not by itself justify the blocking of the petitioner’s credit without first verifying the allegations and following the procedural safeguards required before taking such action.
The Court noted that the Department’s own counsel was unable to dispute the absence of prior intimation and a pre-decisional hearing.
“If the learned High Court Government Pleader cannot dispute that the decision to block the petitioner’s ITC for the value of Rs.3,81,407/- is without intimation or pre-decisional hearing, there will be reason for interference,” the Court observed.
The High Court emphasised that the taxpayer must be granted a pre-decisional hearing before a decision is taken to block ITC.
It noted that the requirement of extending such an opportunity had been repeatedly emphasised by the Court. Blocking credit in the electronic credit ledger directly affects the taxpayer’s ability to utilise the credit and conduct its business operations. Consequently, such action cannot be taken without complying with the applicable procedural safeguards.
The Court accordingly set aside the impugned action and directed the respondent authority to immediately unblock ITC of ₹3,81,407 upon receiving a certified copy of the order.
The High Court preserved the Department’s power to initiate proceedings based on the information received from the Central GST authorities.
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