The Karnataka High Court has held that a decision to block Input Tax Credit (ITC) under Rule 86A of the Central Goods and Services Tax Rules, 2017, must be preceded by an opportunity for the taxpayer to respond.
The bench of Justice B.M. Shyam Prasad observed that the issue was no longer res integra in view of the High Court’s earlier decision in M/s Shah Associates v. Assistant Commissioner of Commercial Taxes and Others. In that case, the Court had ruled that an opportunity must be provided before taking a decision to block ITC.
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The Court was hearing a writ petition filed by an unregistered partnership firm engaged in business in Karnataka. The petitioner challenged the ex parte blocking of ITC reflected in its electronic credit ledger.
The credit was blocked in the exercise of powers under Rule 86A of the CGST Rules. The blocking entries also resulted in the creation of a negative balance in the petitioner’s electronic credit ledger.
The disputed action was taken when the petitioner had been served with summons under Section 70 of the Central Goods and Services Tax Act, 2017, requiring it to produce certain documents.
Before the High Court, counsel for both sides sought to explain the circumstances in which the summons had been issued. The Court, however, found that the crucial question was whether the authorities could block the ITC available in the electronic credit ledger without first giving the taxpayer an opportunity to show cause against the proposed action.
Rule 86A authorises specified GST officers to restrict the use of the amount available in an electronic credit ledger where the officer has reasons to believe that the ITC was fraudulently availed or was otherwise ineligible.
The petitioner contended that the blocking decision had been taken ex parte. It sought the quashing of the order dated October 17, 2025, reversal of the negative blocking entries and permission to utilise the ITC available in its electronic credit ledger.
The High Court held that the requirement of extending an opportunity before blocking ITC had already been settled by its decision in M/s Shah Associates.
Relying on that precedent, the Court concluded that the petitioner must be permitted to submit its objections against the decision to block the credit.
The Court accordingly granted the petitioner one week from the date of its order to file a response before the GST authorities.
It directed the authorities to consider the response and thereafter decide whether the blocking of ITC should continue. Thus, the authorities were required to reconsider the course of action after taking the petitioner’s objections into account.
The writ petition was disposed of without the Court examining in detail the underlying allegations or the circumstances leading to the issuance of summons.
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