Rule 86A ITC Blocking Without Recorded Reasons or Hearing

Rule 86A ITC Blocking Without Recorded Reasons or Hearing Violates Natural Justice and Is Legally Unsustainable

Issue

Whether the action of tax authorities in blocking the Electronic Credit Ledger under Rule 86A without recording written reasons and without affording a prior opportunity of hearing violates the principles of natural justice and is legally sustainable.

Facts

Petitioner Status: The petitioner is a construction company maintaining an Electronic Credit Ledger under the GST framework.
Impugned Action: The Additional Commissioner State Tax Kashmir issued a communication blocking the petitioner’s Input Tax Credit (ITC) under Rule 86A.
Procedural Flaws: The communication blocked the credit ledger without recording explicit reasons in writing and without granting a prior hearing.
Writ Challenge: Aggrieved by the unilateral restriction on its valuable rights, the petitioner challenged the communication before the High Court.

Decision

Arbitrariness & Non-Recording of Reasons: Held that the impugned action suffers from arbitrariness due to the total absence of recorded reasons.
Applicability of Natural Justice: Held that blocking the credit ledger entails adverse civil consequences; therefore, the requirement of a hearing (audi alteram partem) must be read into Rule 86A despite the absence of an express statutory provision.
Quashing of Communication: The impugned communication was set aside for violating the principles of natural justice.
Remand with Conditions: The competent authority was granted liberty to initiate fresh proceedings under Rule 86A, provided the petitioner is given an adequate opportunity of being heard.

Key Takeaways

Natural Justice Applies to Rule 86A: The lack of an express hearing clause in Rule 86A does not exclude principles of natural justice, given the severe civil and financial impact of ITC blocking on a taxpayer.
Mandatory Recording of Reasons: Tax authorities cannot block an Electronic Credit Ledger mechanically; exercise of power under Rule 86A strictly requires objective material and reasons recorded in writing.
Remedial Path for Revenue: Setting aside an arbitrary blocking order does not prevent the department from acting afresh under Rule 86A, provided proper procedure and due process are observed.

HIGH COURT OF JAMMU & KASHMIR AND LADAKH

NCC Ltd.

Union Territory of J & K

Sanjeev Kumar, Actg. CJ.
and MOHD YOUSUF WANI, J.

WP(C) No. 1935 of 2026
CM No. 5208 of 2026

AUGUST 12, 2026

Jahangir Iqbal Ganie, Sr. Adv., Sikander Hayat Khan and Vishnu Tallapragada, Advs. for the Petitioner. Mohsin Qadri, Sr. AAG and Ms. Maha Majeed, Assisting Counsel for the Respondent.

ORDER

1. The petitioner, a construction company, invokes the extraordinary jurisdiction vested in this Court under Article 226 of the Constitution of India to throw challenge to an intimation/communication dated 22.07.2026 issued by one Shri Parveez Ahmad Raina, Additional Commissioner, Stat, Kashmir, whereby the petitioner has been intimated that Input Tax Credit (ITC) amounting to Rs. 10,45,38,432/- has been blocked.

2. The impugned communication has been called in question primarily, on the ground that the same does not spell out any reason for said blocking, nor has the same been passed after affording an opportunity of being heard to the petitioner. The petitioner also seeks to assail the impugned communication on the ground that the Additional Commissioner, Stat, Kashmir did not have the jurisdiction to pass the order in terms of Rule 86-A of the Central Goods and Services Tax Rules, 2017 [“the Rules”].

3. It is further contended by the learned senior counsel appearing for the petitioner that the respondents could not have blocked the entire ITC amounting to Rs. 10,45,38,432/- and that, in terms of Rule 86-A, the restriction could extend only to an amount equivalent to such credit as is available in the electronic credit ledger for discharge of any liability under Section 49 of the Central Goods and Services Tax Act, 2017 or for claiming any refund of any unutilized amount.

4. Having heard learned counsel for the parties and perused the material on record, we are of the considered opinion that that the impugned communication suffers from the vice of arbitrariness, in that the Authority concerned has not given any reasons for blocking the Input Tax Credit (ITC) of the petitioner amounting to more than ten cores and also that the order of blocking the Input Tax Credit (ITC) which adversely affects the rights and interests of the petitioner has been passed without adhering to the principles of audi alteram partem.

5. It is true that Rule 86-A of the Rules does not, in express terms, provide for an opportunity of hearing to the taxpayer before passing an order blocking his Input Tax Credit (ITC). However, having regard to the nature of action envisaged under Rule 86-A of the Rules, which definitely affects the taxpayer adversely, the adherence to Rule of audi alteram partem needs to be read into the said provision.

6. The aforesaid view finds support from the judgments of the Division Benches of the High Courts of Karnataka and Telangana in case titled “K-9 Enterprises v. State of Karnatka (Karnataka)/(2025) 137 GSTR 450; 2024 SCC Online Kar 2716 and ” Bhavani Oxides v. State of Telangana (Telangana)/(2024) 132b GSTR 304; 2024 SCC Online TS 3306 . The judgment passed by the Karnatka High Court (supra) has already been upheld by the Hon’ble Supreme Court by dismissing the Special Leave Petition (SLP).

7. In view of the aforesaid, we need not to go into other aspects of the matter and leave it open to the petitioner to raise the same before the concerned Authority.

8. For the foregoing reasons, we find merit in this petition. The impugned communication dated 22.07.2026, which is found to have been passed in violation of the principles of natural justice, is set aside. The setting aside of impugned communication, however, shall not come in the way of the Competent Authority of respondents to pass an appropriate order under Rule 86-A of the Rules of 2017, after providing the petitioner an adequate opportunity of being heard.