High Court Directs Immediate Unblocking of Input Tax Credit Blocked Without Prior Notice or Hearing

By | September 25, 2026
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High Court Directs Immediate Unblocking of Input Tax Credit Blocked Without Prior Notice or Hearing

High Court Directs Immediate Unblocking of Input Tax Credit Blocked Without Prior Notice or Hearing

Issue

Whether the blocking of Input Tax Credit (ITC) under Rule 86A on the GST portal without issuing prior notice or providing a pre-decisional hearing to the taxpayer is legally sustainable.

Facts

  • Nature of Business: The petitioner is a Limited Liability Partnership (LLP) engaged in providing construction services to industrial establishments.
  • Unilateral Ledger Blocking: Input Tax Credit amounting to ₹3,81,407 was blocked on the GST portal without issuing any prior intimation, show cause notice, or pre-decisional hearing to the petitioner.
  • Evidence Placed: The petitioner placed screenshots of the portal on record evidencing the blocking of the electronic credit ledger.
  • Revenue’s Defense: The respondent produced a Central GST communication flagging the petitioner as a recipient from a alleged non-existent entity and advising verification-based action.
  • Scope of Communication: The departmental advisory was purely indicative and recommended action as fit upon verification, without directing mandatory or automatic blocking without compliance with principles of natural justice.
  • Writ Challenge: The petitioner filed a writ petition challenging the arbitrary and mechanical blocking of its ITC without prior notice.

Decision

  • Violation of Natural Justice: The State counsel did not dispute the absence of prior intimation or pre-decisional hearing, leading the Court to hold that the blocking action suffered from a fundamental procedural flaw. [Para 3] [In favour of assessee]
  • Advisory Cannot Override Principles of Natural Justice: The reliance placed on the Central GST communication was misplaced, as an advisory seeking verification-based action does not justify mechanical blocking without adherence to due process. [Para 3] [In favour of assessee]
  • Direction for Immediate Unblocking: The High Court allowed the writ petition and directed the respondent to unblock the ITC of ₹3,81,407 forthwith. [Para 3] [In favour of assessee]
  • Liberty for Fresh Proceedings: The order was passed without prejudice to the department’s right to initiate fresh proceedings after serving due notice and extending a proper pre-decisional hearing. [Para 3] [Matter remanded]

Key Takeaways

  1. Mandate of Pre-Decisional Hearing for Rule 86A: Unilateral blocking of an assessee’s Electronic Credit Ledger under Rule 86A without prior notice or an opportunity of being heard violates natural justice principles.
  2. Internal Advisories Are Not Final Orders: Departmental communications or fraud alerts advising verification do not confer absolute authority on officers to mechanically restrict ITC without conducting a proper inquiry and hearing.
  3. Restoration of Credit with Departmental Liberty: Courts will order the immediate restoration of illegally blocked ITC while preserving the revenue authority’s right to issue proper show cause notices and adjudicate in accordance with law.
HIGH COURT OF KARNATAKA
Lazard Infrastructure LLP
v.
Assistant Commissioner of Commercial Taxes
B M Shyam Prasad, J.
WRIT PETITION NO. 28678 OF 2026 (T-RES)
SEPTEMBER  15, 2026
Hemant Venkatray Pai and Lochana S Babu, Advs. for the Petitioner. Smt. Jyoti M Maradi, HCGP for the Respondent.
ORDER
1. The petitioner is a Limited Liability Partnership engaged in providing construction services to the different industrial establishments, and the petitioner’s grievance is with the decision to block Input Tax Credit [ITC] for a value of Rs.3,81,407/-. The petitioner has produced screenshots of the portal [Annexure – D] to contend that its ITC for the afore value is blocked without any notice or pre-decisional hearing. Mr. Hemant Venkatray Pai, the learned counsel who appears for Ms. Lochana S. Babu who is on record for the petitioner, argues for interference emphasizing the afore.
2. Ms. Jyoti M. Maradi, a learned High Court Government Pleader, who accepts notice for the respondent cannot dispute that the petitioner is not issued with any Intimation of the possibility of ITC block or that the petitioner is not extended pre-decisional hearing, but the learned High Court Government Pleader places on record a Communication addressed by the Central GST Authorities to contend that the petitioner is identified as one of those entities which has received services from a non-existent entity and action must be taken to ensure that both the suppliers and the recipients do not take advantage of ITC.
3. 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. Further, this Court, on perusal of the Communication addressed by the Central GST authorities, must observe that the Communication is only to act as fit upon verification. This Court, in the circumstances, must interfere directing the respondent to unblock the blocked ITC but without prejudice to cause intimation and decide on blocking ITC after extending a pre-decisional hearing as repeatedly emphasized by this Court. In the light of the afore, the following.
ORDER
[A] The petition is allowed.
[B] The respondent, immediately upon receipt of a certified copy of this order, is directed to unblock the ITC for a value of Rs.3,81,407/- but without prejudice to begin the proceedings as observed.