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Blocking of Electronic Credit Ledger Without Prior Notice is Unsustainable and Liable to be Quashed

Issue

Whether the revenue authority can block an assessee’s Electronic Credit Ledger (ECL) under Rule 86A and create a negative balance without providing a pre-decisional notice or an opportunity for a hearing.

Facts

Action Taken: The Revenue Department blocked the petitioner’s Electronic Credit Ledger and created a negative balance.
Revenue’s Justification: According to Annexure-A, the block was initiated because credit was allegedly claimed without the actual receipt of goods or services, and the supplier was found to be non-functioning.
Petitioner’s Ground: The petitioner challenged the action, arguing that the principles of natural justice require a pre-decisional notice or hearing before such a restrictive measure is taken under Rule 86A.
Revenue’s Admission: During the proceedings, the Revenue could not dispute the fact that no notice was issued to the petitioner prior to the blocking of the ledger.

Decision

Violation of Natural Justice: The court held that the blocking of the ECL was unsustainable due to the admitted absence of a pre-decisional notice.
Quashing of Order: The action recorded in Annexure-A was set aside by the court.
Immediate Relief: The Respondent was directed to unblock the ledger immediately to ensure the petitioner could file their returns.
Future Proceedings: The court reserved liberty for the Revenue to proceed against the petitioner in accordance with the law, keeping all contentions open for future adjudication.
Result: The decision was rendered in favor of the assessee.

Key Takeaways

Mandatory Procedural Fairness: Rule 86A powers are high-handed; therefore, the Revenue must provide a notice and an opportunity to be heard before depriving a taxpayer of their credit.
Unblocking for Compliance: Since a blocked ledger often prevents the filing of subsequent GST returns, courts are likely to order immediate unblocking if the initial procedure was flawed.
Negative Balance Scrutiny: The creation of a “negative balance” in the ECL is a specific area of legal contention; however, the lack of notice remains the primary ground for quashing such orders at the threshold.

HIGH COURT OF KARNATAKA

Suf Enterprises

Assistant Commissioner of Central Tax^*

S Sunil Dutt Yadav, J.

WRIT PETITION NO. 39384 OF 2025 (T-RES)

FEBRUARY 20, 2026

Bhagavath P., Adv. for the Petitioner. Akash B. Shetty, Adv. for the Respondent.

ORDER

1. The petitioner has called in question the action of respondent No.1 in blocking the electronic credit ledger and creating a negative balance in terms of Annexure-A.

2. On perusal of Annexure-A, it is noticed that the electronic credit ledger has been blocked with the reason assigned as “Credit claimed without receipt of goods/services, supplier found non-functioning”.

3. Learned counsel for the petitioner submits that the power to block the credit ledger is by virtue of Rule 86A of the Central Goods and Services Tax Rules, 2017. It is further submitted that though there is no statutory mandate regarding hearing to be afforded before such power is exercised, however the Courts have interpreted that before blocking the credit ledger in exercise of power under Rule 86A, the assesses are required to be heard and reliance is placed on the judgment of this Court in the case of K-9-Enterprises v. State of Karnataka (Karnataka)/2024 (10) TMI 491 – Karnataka High Court.

4. Learned counsel, Sri. Akash B. Shetty appearing for the respondent – revenue is not able to controvert regarding the assertion that there was no notice before the action of blocking the credit ledger.

5. Perused the order passed in the case of K-9 Enterprises (supra) and paragraph No.8.13 reads as follows:

“8.13 In view of the aforesaid discussion, we are of the considered opinion that the learned Single Judge clearly fell in error in coming to the conclusion that a pre-decisional hearing was not required to have been provided/granted to the appellants by the respondents-revenue prior to passing the impugned orders blocking the ECL of the appellants and consequently, the said findings recorded by the learned Single Judge deserve to be set aside.

Point No.1 is accordingly answered in favour of the Appellant and against the respondents-revenue by holding that respondents-revenue committed a grave and serious error/illegality/infirmity in not providing/granting a pre-decisional hearing to the Appellant before passing the impugned order blocking its Electronic Credit Ledger under Rule 86A of the CGST Rules and consequently, the impugned orders deserve to be set aside.”

6. Taking note of the admitted position that no notice was issued, the action of blocking the credit ledger at Annexure-A is set aside. Respondent is directed to unblock the electronic credit ledger of the petitioner immediately upon receipt of copy of the order so as to enable the petitioner to file returns.

7. Liberty is reserved in favour of the respondent to proceed against the petitioner, if circumstances are so made out in accordance with law and taking note of the observations made in the case of K-9 Enterprises in W.A.No.100425/2023 and connected matters (supra). All contentions are kept.

Accordingly, petition is disposed of.