Karnataka High Court
The Lead Factory vs The Assistant Commissioner Of ... on 1 August, 2025
Author: S.R.Krishna Kumar
Bench: S.R.Krishna Kumar
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NC: 2025:KHC:29928
WP No. 8261 of 2025
HC-KAR
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 1ST DAY OF AUGUST, 2025
BEFORE
THE HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR
WRIT PETITION NO.8261 OF 2025 (T-RES)
BETWEEN:
THE LEAD FACTORY
REPRESENTED BY ITS PROPRIETOR,
SRI.CHETAN NARAYAN S/O SRI. NARAYAN,
AGED ABOUT 32 YEARS,
PLOT NO.98-G, PHASE - II,
JIGANI INDUSTRIAL AREA, ANEKAL TALUK,
BENGALURU - 560 105.
...PETITIONER
(BY SRI. SURENDRAN J.G. THUMBUCHETTY, ADVOCATE)
AND:
1. THE ASSISTANT COMMISSIONER OF COMMERCIAL TAXES
(LOCAL GOODS AND SERVICES TAX OFFICE - 027),
DGSTO-04, VTK - 2, KORAMANGALA,
BENGALURU - 560 047.
2. THE STATE OF KARNATAKA,
REPRESENTED BY ITS FINANCE SECRETARY,
Digitally signed VIDHANA SOUDHA,
by CHANDANA BENGALURU - 560 001.
BM
Location: High
Court of 3. THE UNION OF INDIA,
Karnataka REPRESENTED BY ITS FINANCE SECRETARY,
MINISTRY OF FINANCE,
DEPARTMENT OF REVENUE,
NEW DELHI - 110 001.
...RESPONDENTS
(BY SRI. ADITYA VIKRAM BHAT AGA FOR R-1 & R-2;
SMT. L.V. APARNA, CGSC FOR R-3)
THIS W.P. IS FILED UNDER ARTICELS 226 AND 227 OF THE
CONSTITUITON OF INDIA PRAYING TO QUASH THE ORDER DATED
06.03.2025 PASSED BY THE FIRST RESPONDENT UNDER RULE 86 OF
THE CGST/SGST RULES (ANNEXURE-A) AND ETC.
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NC: 2025:KHC:29928
WP No. 8261 of 2025
HC-KAR
THIS PETITION COMING ON FOR FURTHER HEARING, THIS DAY,
ORDER WAS MADE THEREIN AS UNDER:
CORAM: HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR
ORAL ORDER
In this petition, petitioner seeks the following reliefs:
"(i) The petitioner most respectfully prays that this Hon'ble High Court may be pleased to issue a Writ of Certiorari or a direction in the nature of a Writ of Certiorari quashing the order dated 06.03.2025 passed by the First Respondent under Rule 86 of the CGST/SGST Rules (Annexure-"A")
(ii) This Hon'ble Court may be pleased to declare the provisions of Rule 86A of the CGST/SGST Rules, 2017 as being unreasonable, arbitrary besides being discriminatory and therefore violative of Article 14 of the Constitution of India.
(iii) This Hon'ble Court may be pleased to declare the provisions of Rule 86A of the CGST/SGST Rules, 2017 as being unreasonable, inasmuch as the said Rule does not incorporate the principles of natural justice and is therefore violative of Article 19(1)(g) of the Constitution of India.
(iv) This Hon'ble Court may be pleased to read down the provisions of Rule 86A of the CGST/SGST Rules, 2017 so as to enable a Registered Person to show reasonable cause before action is taken under the Rule by an authorized officer.-3-
NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR
(v) This Hon'ble High Court may be pleased to issue such other writ or writs as this Hon'ble Court may deem it fit to grant in the facts and circumstances of the petitioner's case."
2. Heard learned counsel for the petitioner and learned AGA for respondent Nos.1 and 2 and learned counsel for respondent No.3 and perused the material on record.
3. In addition to reiterating the various contentions urged in the memorandum of petition and referring to the material on record, learned counsel for the petitioner invited my attention to the impugned order at Annexure - A dated 06.03.2025 in order to point out that apart from the fact that the notice / endorsement dated 28.02.2025 did not contain reasons to believe that the petitioner had fraudulently filed or was ineligible for Input Tax Credit in its Electronic Credit Ledger and the impugned order is a cryptic, laconic, non-speaking order passed without application of mind and the same deserves to be set aside. In support of his submissions, he places reliance on the judgment of the Division Bench of this Court in the case of K-9 Enterprises Vs. State of Karnataka and another - W.A.No.100425/2023 and connected matters.
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4. Per contra, learned counsel for the respondent -
revenue submits that in the light of the availability of alternative remedy by way of an appeal under Section 107 of the KGST Act, the present petition is not maintainable. It is also submitted that both the impugned order as well as the Notice / Endorsement satisfy the requirements of Rule 86A of the KGST Rule and consequently, there is no merit in the petition and the same is liable to be dismissed. In support of his submission, he places reliance on the judgment of the Delhi High Court in the case of Bhupender Kumar Vs. Additional Commissioner Adjudication CGST, Delhi North and others - W.P.(C)9141/2025 & CM APPL.38815/2025.
5. Before adverting to the rival submissions, it would be necessary to extract the impugned notice / endorsement which reads as under:
"ENDORSEMENT Subject: Blocking of ITC-reg.
**************** The office of ACCT, LGSTO-027, Koramangala Bangalore has received a letter in vide Reference GEXCOM / TECH / MISC / 4035 / 2024-CGST-DIV-SD-9-COMRTE- BENGALURU(S) DATE: 03/12/2024., wherein it has been reported that the registered Taxpayer with GSTIN 29EBRPG0049F1ZJ and with Legal Name M/s. VINAYAKA ENTERPRISES has been found to be a bill trader and -5- NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR involved in issuance / availment in fake invoices and the business premises is not existing.
Further, the above said M/S. VINAYAKA ENTERPRISES has recorded the transaction in B2B and passed on ITC for the period May-2024 to Aug-2024. The ITC availed pertaining to this transaction needs to be recovered or reversed. The details are as follows:
SL. Return Taxable Total
Category IGST CGST SGST CESS
No. Period Value GST
1. Aug- B2B 8283924 0 745553 745553 0 1491106
2024
2. Jul- B2B 19046291 0 1714166 1714166 0 3428332
2024
3. Jun- B2B 42724150 0 3845174 3845174 0 7690348
2024
4. MAY- B2B 16889745 0 1520077 1520077 0 3040154
2024
As per Rule 86A of the Central/State Goods and Services Tax Rules, 2017, the authority has requested to block the aforementioned ITC and initiate recovery proceedings. In this regard, you are required to either reverse the inadmissible ITC or submit a reply explaining why the ITC should not be restricted, within three days from the date of service of this endorsements."
6. The impugned order at Annexure - A dated 06.03.2025 reads as under:
"GOVERNMENT OF KARNATAKA Department of Commercial Taxes Proceedings of the Assistant Commissioner of Commercial Taxes O/o. Local Goods and Services Tax Office-027. Present: SUSHMA.N, ACCT LGSTO-027 Preamble:
According to Rule 86A introduced by the Central Government, Conditions of use of amount available in electronic credit ledger have been notified. Accordingly.-6-
NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR (1) The Commissioner or an officer authorized by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as
(a) The credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under Rule 36-
i. issued by a registered person who has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or ii. without receipt of goods or services or both or
(b) the credit of input tax has been availed on the strength of tax invoices or debit notes or any other document prescribed under rule 36 in respect of any supply, the tax charged in respect of which has not been paid to the Government; or
(c) The registered person availing the credit of input tax has been found non-existent or not to be conducting any business from any place for which registration has been obtained; or
(d) The registered person availing any credit of input tax is not in possession of a tax invoice or debit note or any other document prescribed under rule 36, may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledged for discharge of any liability under section 49 or for claim of any refund of any unutilized amount.
(2) The Commissioner, or the officer authorized by him under sub-rule(1) may, upon being satisfied that conditions for -7- NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR disallowing debit of electronic credit ledger as above, no longer exist, allow such debit.
(3) Such restriction shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction."
Reference: GEXCOM/TECH/MISC/4035/2024-CGST-DIV-SD-9- COMRTE-BENGALURU(S) DATE: 03/12/2024.
The office of ACCT, LGSTO-027, Koramangala Bangalore has received a letter in vide Reference 1 GEXCOM/TECH/MISC/4035/2024-CGST-DIV-SD-9 COMRTE- BENGALURU(S) DATE: 03/12/2024. Wherein it has been reported that the registered Taxpayer with GSTIN 29EBRPG0049F1ZJ and with Legal Name M/S.VINAYAKA ENTERPRISES has been found to be non-existent at his place of business premises and is involved in issuance / availment in fake invoices. The proper Officer (PS AJAY AIYAPPA) Superintendent RANGE-BSD9 had initiated a suo-moto cancellation against the supplier M/s. VINAYAKA ENTERPRISES Dated: 23/10/2024 by issuing REG 19 issued quoting Section 29(2)(e)-registration obtained by means of fraud, wilful misstatement or suppression of facts as below:
Reference No. ZA290824055720C GSTIN Status 29EBRPG0049F1ZJ REG 19 issued -Suo Moto cancelled Legal Name of Business Date of Original Registration GYANENDR SINGH CHAUHAN 01/01/2023 Reason for Cancellation Response By Tax Payer Tax payer is not traceable NA -8- NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR FORM GST REG-19 [SEE RULE 22(3) ] Reference No: ZA291024088507A Date:23/10/2024 To, GYANENDR SINGH CHAUHAN Plot No.26/2, Atibele, Bengaluru Bengaluru Urban, Karnataka - 562 107 GSTIN/UIN: 29EBRPG0049F1ZJ Application Reference Number (ARN): AA290824036198T Date:
Order for Cancellation of Registration This has reference to show cause notice issued dated 13/08/2024 Whereas no reply to the show cause notice has been submitted; and whereas the undersigned based on record available with this office is of the opinion that your registration is liable to be cancelled for following reason(s)
1. Other Remarks:
Section 29(2)(e)-registration obtained by means of fraud, wilful misstatement or suppression of facts.
The effective date of cancellation of your registration is 01/01/2023.
2. Kindly refer to the supportive document(s) attached for case specific details - Not Applicable.
3. It may be noted that a registered person furnishing return under sub-
section (1) of Section 39 of the CGST Act, 2017 is required to furnish a final return in FORM GSTR-10 within three months of the date of this order.
4. You are required to furnish all your pending returns.
5. It may be noted that the cancellation of registration shall not affect the liability to pay tax and other dues under this Act or to discharge any obligation under this Act or the rules made thereunder for any period prior to the date of cancellation whether or not such tax and other dues are determined before or after the date of cancellation.
Place: Karnataka Date: 23/10/2024 PS AJAY AIYAPPA Superintendent Range -BSD9 -9- NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR Table showing Ineligible ITC availed by THE LEAD FACTORY(29AVQPC1034K1ZH) Blocked ITC Summary:
Description IGST SGST CGST Cess Total Total ITC to be 0 78,24,970 78,24,970 0 1,56,49,940 blocked ITC of Rs.1,56,49,940/- is blocked according to Rule 86(1)(a)(i) and (b) of CGST Act mentioned in the Preamble and Reference 1."
7. While dealing with the scope and ambit of Rule 86A of the KGST Rules, the Division Bench of this Court in K-9 Enterprises's case has held as under:
"9. The next point that arises for consideration is as to whether the respondents- Revenue were justified in passing the impugned orders blocking the electronic credit ledgers of the appellants by invoking rule 86A of the CGST Rules which mandates that the respondents-Revenue should have "reasons to believe" that the ITC available in the ECL was fraudulently availed or was ineligible as contemplated in the said provision; in this regard, the learned single judge1 noticed that two pre-requisites/conditions had to be satisfied/fulfilled before invocation of rule 86A and blocking the ECL of the appellants and held as under (page 443 in 137 GSTR):
"18. The first requisite of the rule which is required to be considered by the competent authority is with regard to the basis of material available before he taking any action for
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR blocking of electronic credit ledger. The second prerequisite is of recording the reasons in writing for invoking the powers under rule 86A of the Rules of 2017. Unless the aforesaid two pre-requisites are fulfilled, the competent authority cannot invoke the powers under rule 86A of the Rules of 2017 for the purpose of disallowing the debit of the determined amount to the electronic credit ledger or to block the electronic credit ledger even to the extent of amount fraudulently or wrongly availed by the petitioners/assessee."
9.1 However, the learned single judge [K-9- Enterprises v. State of Karnataka, (2025) 137 GSTR 426 (Karn).] came to the erroneous conclusion that the respondents-Revenue had fulfilled/satisfied the aforesaid twin/dual pre-requisites/requirements, viz., respondents had "reasons to believe" which were based on cogent material available with them to invoke rule 86A of the CGST Rules; in this context, the learned single judge1 failed to appreciate that the only "reason to believe" was alleged satisfaction of certain officers who conducted a field visit in Goa and noticed that the said suppliers were not in business. It is well-settled that the expression "reason to believe" would necessarily mean that the respondents must arrive at a satisfaction based on their own independent inquiry and not upon borrowed inquiry as has been done in the instant case.
9.2 The learned single judge [K-9- Enterprises v. State of Karnataka, (2025) 137 GSTR
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR 426 (Karn).] also failed to appreciate that rule 86A was drastic and draconian in nature warranting existence of "reasons to believe" before exercising the said power by strictly complying with all the conditions/requirements of the said provision; further, an order blocking the ECL by invoking rule 86A cannot be passed merely based on investigation reports and without any application of mind and that the onus was on the respondents- Revenue to show that the appellants had deliberately availed fraudulent or ineligible ITC; in the instant case, the ECL of the appellants had been blocked by the respondents without verifying the genuineness of the transaction and a bona fide purchaser cannot be denied ITC on account of a supplier's default and the recipient cannot be made to suffer denial of ITC for the wrong doings of the supplier; so also, blocking of ECL would defeat the principles and purpose of value added tax and would lead to a cascading effect thereby resulting in irreparable injury and hardship to the appellants especially when ITC was a valuable right which cannot be confiscated in a manner opposed to law.
9.3 The learned single judge1 also failed to appreciate that the procedure prescribing the requirements for blocking ECL has been explained by the respondents themselves in the CBEC Circular dated November 2, 2021, the relevant portions are as under:
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR 3.1.2 Perusal of the rule makes it clear that the Commissioner, or an officer authorised by him, not below the rank of Assistant Commissioner, must have 'reasons to believe' that credit of input tax available in the electronic credit ledger is either ineligible or has been fraudulently availed by the registered person, before disallowing the debit of amount from electronic credit ledger of the said registered person under rule 86A. The reasons for such belief must be based only on one or more of the following grounds:
(a) The credit is availed by the registered person on the invoices or debit notes issued by a supplier, who is found to be non-existent or is found not to be conducting any business from the place declared in registration.
(b) The credit is availed by the registered person on invoices or debit notes, without actually receiving any goods or services or both.
(c) The credit is availed by the registered person on invoices or debit notes, the tax in respect of which has not been paid to the Government.
(d) The registered person claiming the credit is found to be non-existent or is found not to be conducting any business from the place declared in registration.
(e) The credit is availed by the registered person without having any invoice or debit note or any other valid document for it.
3.1.3 The Commissioner, or an officer authorised by him, not below the rank of Assistant Commissioner, must form an opinion for disallowing debit of an amount from electronic credit ledger in respect of a registered person, only after proper application of mind considering all the facts of the case, including the nature of prima facie fraudulently availed or ineligible input-tax credit and whether the same is covered under the grounds mentioned in sub- rule (1) of rule 86A, as discussed in paragraph 3.1.2 above; the amount of input-tax credit involved; and whether disallowing such debit of electronic credit ledger of a person is necessary for restricting him from utilizing/passing on
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR fraudulently availed or ineligible input-tax credit to protect the interests of revenue.
3.1.4 It is reiterated that the power of disallowing debit of amount from electronic credit ledger must not be exercised in a mechanical manner and careful examination of all the facts of the case is important to determine case(s) fit for exercising power under rule 86A. The remedy of disallowing debit of amount from electronic credit ledger being, by its very nature, extraordinary, has to be resorted to with utmost circumspection and with maximum care and caution. It contemplates an objective determination based on intelligent care and evaluation as distinguished from a purely subjective consideration of suspicion. The reasons are to be on the basis of material evidence available or gathered in relation to fraudulent availment of input-tax credit or ineligible input-tax credit availed as per the conditions/grounds under sub-rule (1) of rule 86A.
3.3.1 The amount of fraudulently availed or ineligible input-tax credit availed by the registered person, as per the grounds mentioned in sub-rule (1) of rule 86A, shall be prima facie ascertained based on material evidence available or gathered on record. It is advised that the powers under rule 86A to disallow debit of the amount from electronic credit ledger of the registered person may be exercised by the Commissioner or the officer authorized by him, as per the monetary limits detailed in paragraph 3.2.1 above. The officer should apply his mind as to whether there are reasons to believe that the input-tax credit availed by the registered person has either been fraudulently availed or is ineligible, as per conditions/grounds mentioned in sub-rule (1) of rule 86A and whether disallowing such debit of electronic credit ledger of the said person is necessary for restricting him from utilizing/passing on fraudulently availed or ineligible input-tax credit to protect the interests of revenue. Such 'Reasons to believe' shall be duly recorded by the concerned officer in writing on file, before he proceeds to disallow debit of
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR amount from electronic credit ledger of the said person."
9.4 It is clear from the aforesaid CBIC Circular that the respondents- Revenue must form an opinion for disallowing debit of an amount from electronic credit ledger in respect of a registered person, only after proper application of mind considering all the facts of the case, including the nature of prima facie fraudulently availed or ineligible input-tax credit and whether the same is covered under the grounds mentioned in rule 86A(1). As stated earlier, rule 86A, which in effect is the power to block ECL is drastic in nature which creates a disability for the taxpayer to avail of the credit in ECL for discharge of his tax liability which he is otherwise entitled to avail and therefore, all the requirements of rule 86A would have to be fully complied with before the power thereunder is exercised; when this Rule requires arriving at a subjective satisfaction which is evident from the use of words, "must have reasons to believe", the satisfaction must be reached on the basis of some objective material available before the authority and cannot be made on the flights of ones fancies or whims or caprices.
9.5 In the instant case, the electronic credit ledgers have been blocked solely on the basis of communication from another officer (Field visit report by the Asst. State Tax Officer, Vasco-D-Gama, (Goa)). There was no tangible material to form any belief that the ITC lying in the appellants' ECL was
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR on account of any fake invoice; it had proceeded to take action solely on the basis of a direction issued by another authority. Before the drastic measure to block a taxpayer's ECL is taken, it was necessary for the concerned officer to have some material to form a belief that the conditions under rule 86A are satisfied by making an independent analysis before such action is taken and even this aspect has not been considered or appreciated by the learned single judge [K-9-Enterprises v. State of Karnataka, (2025) 137 GSTR 426 (Karn).] while passing the impugned order, which deserves to be set aside on this ground also.
9.6 The learned single judge [K-9- Enterprises v. State of Karnataka, (2025) 137 GSTR 426 (Karn).] also did not appreciate that the power of disallowing debit of amount from electronic credit ledger must not be exercised in a mechanical manner and careful examination of all the facts of the case is important to determine case(s) fit for exercising power under rule 86A. The remedy of disallowing debit of amount from electronic credit ledger being by its very nature extraordinary, has to be resorted to with utmost circumspection and with maximum care and caution. It contemplates an objective determination based on intelligent care and evaluation as distinguished from a purely subjective consideration of suspicion. The reasons are to be on the basis of material evidence available or gathered in relation to fraudulent availment of input-tax credit
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR or ineligible input-tax credit availed as per the conditions/grounds in rule 86A.
9.7 A perusal of the impugned orders will indicate that the same have been passed based on the communication received from other officers, without any independent application of mind. This shows that exercise of power under rule 86A was not because he was independently satisfied about the need for blocking the ECL but, was due to the fact that he felt compelled to obey the command of another officer. This is not the manner in which the law expects the power under rule 86A to be exercised. When a thing is directed to be done in a particular manner, it must be done in that manner or not at all is the well-established principle of administrative law. On a perusal of the impugned orders, it is crystal clear that the order to block the ECL provisionally was out of the borrowed satisfaction of the respondent-authorities rather than based on any independent analysis. 9.8 As stated supra, the impugned order discloses that the same has been passed mechanically and is based on borrowed satisfaction and does not meet the test of formation of an opinion of the Assessing Officer who seems to have been influenced by the findings of the Investigation Wing (i.e., Field visit report by the Asst. State Tax Officer, Vasco-D-Gama, (Goa)) and have not independently formed an opinion on the likely additions to be made during assessment
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR proceedings. In the light of existence of a legal mandatory pre-requirement and precondition of recording of formation of opinion which is in pari materia with "reasons to believe", it was incumbent upon the officer to arrive at his own satisfaction and not borrowed satisfaction by proper application of mind; the respondents have proceeded solely on the basis that the supplier has been found to be non- existent or not to be conducting any business from the place which it has obtained registration, has blocked the input tax which is impermissible in law without checking the genuineness or otherwise of the transaction and consequently, the impugned orders are bald, vague, cryptic, laconic, unreasoned and non-speaking and deserve to be set aside. 9.9 While dealing with the provisions of the CGST Act, this court in Xiaomi's case [Xiaomi Technology India Pvt. Ltd. v. Deputy Commissioner of Income-tax, (2023) 451 ITR 58 (Karn); 2022 SCC OnLine Kar 1731; (2022) 145 taxman.com 501 (Kar).] , wherein one of us speaking for the court held as under (paras 8-14, pages 66-73 in 451 ITR):
"10. A perusal of the impugned order will indicate that except for stating that there is likely addition of the amount mentioned in the order, no reasons, much less valid or cogent reasons are assigned by the first respondent as to how and why he has formed an opinion that it was necessary to provisionally attach the fixed deposits of the petitioner for the purpose of protecting the interest of the Revenue. The requirements and parameters preceding passing of a provisional attachment order came up for consideration before the
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR apex court in the case of Radha Krishan Industries' case [Radha Krishan Industries v. State of Himachal Pradesh, (2021) 88 GSTR 228 (SC); (2021) 6 SCC 771; 2021 SCC OnLine SC 334.] , wherein it was held as under (page 259 in 88 GSTR):
'48. On the other hand, when the proper officer is of the opinion that the amount which has been paid under sub-section (5) falls short of the amount which is actually payable, a notice under sub-section (1) is to issue for the amount which falls short of what is actually payable. Sub-section (8) contains a stipulation that where a person who is chargeable with tax under sub-section (1) pays the tax together with interest and a penalty of twenty- five per cent. of the tax within thirty days of the issuance of the notice, all proceedings in respect of the notice shall be deemed to be concluded. Under sub-section (9), the proper officer after considering the representation of the person chargeable to tax is authorised to determine the amount of tax, interest and penalty due and to issue an order. A period of five years is stipulated by sub-section (10) for the issuance of an order in sub-section (9). Sub-section (11) stipulates that upon service of an order under sub-section (9), all proceedings in respect of the notice shall be deemed to be concluded upon the person paying the tax with interest under section 50 and a penalty equivalent to 50 per cent. of the tax within thirty days of the communication of an order. These provisions indicate how sub- sections (5), (8) and (11) operate at different stages of the process.
49. Now in this backdrop, it becomes necessary to emphasise that before the Commissioner can levy a provisional attachment, there must be a formation of "the opinion" and that it is necessary "so to do" for the purpose of protecting the interest of the Government revenue. The power to levy a provisional attachment is draconian in nature.
By the exercise of the power, a property belonging to the taxable person may be attached, including a bank account. The
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR attachment is provisional and the statute has contemplated an attachment during the pendency of the proceedings under the stipulated statutory provisions noticed earlier. An attachment which is contemplated in section 83 is, in other words, at a stage which is anterior to the finalisation of an assessment or the raising of a demand. Conscious as the Legislature was of the draconian nature of the power and the serious consequences which emanate from the attachment of any property including a bank account of the taxable person, it conditioned the exercise of the power by employing specific statutory language which conditions the exercise of the power. The language of the statute indicates first, the necessity of the formation of opinion by the Commissioner; second, the formation of opinion before ordering a provisional attachment; third the existence of opinion that it is necessary so to do for the purpose of protecting the interest of the Government revenue; fourth, the issuance of an order in writing for the attachment of any property of the taxable person; and fifth, the observance by the Commissioner of the provisions contained in the rules in regard to the manner of attachment. Each of these components of the statute are integral to a valid exercise of power. In other words, when the exercise of the power is challenged, the validity of its exercise will depend on a strict and punctilious observance of the statutory preconditions by the Commissioner. While conditioning the exercise of the power on the formation of an opinion by the Commissioner that 'for the purpose of protecting the interest of the Government revenue, it is necessary so to do', it is evident that the statute has not left the formation of opinion to an unguided subjective discretion of the Commissioner. The formation of the opinion must bear a proximate and live nexus to the purpose of protecting the interest of the Government revenue.
50. By utilising the expression "it is necessary so to do" the Legislature has
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR evinced an intent that an attachment is authorised not merely because it is expedient to do so (or profitable or practicable for the Revenue to do so) but because it is necessary to do so in order to protect interest of the Government revenue. Necessity postulates that the interest of the Revenue can be protected only by a provisional attachment without which the interest of the Revenue would stand defeated. Necessity in other words postulates a more stringent requirement than a mere expediency. A provisional attachment under section 83 is contemplated during the pendency of certain proceedings, meaning thereby that a final demand or liability is yet to be crystallised. An anticipatory attachment of this nature must strictly conform to the requirements, both substantive and procedural, embodied in the statute and the rules. The exercise of unguided discretion cannot be permissible because it will leave citizens and their legitimate business activities to the peril of arbitrary power. Each of these ingredients must be strictly applied before a provisional attachment on the property of an assessee can be levied. The Commissioner must be alive to the fact that such provisions are not intended to authorise Commissioners to make pre-emptive strikes on the property of the assessee, merely because property is available for being attached. There must be a valid formation of the opinion that a provisional attachment is necessary for the purpose of protecting the interest of the Government revenue.
51. These expressions in regard to both the purpose and necessity of provisional attachment implicate the doctrine of proportionality. Proportionality mandates the existence of a proximate or live link between the need for the attachment and the purpose which it is intended to secure. It also postulates the maintenance of a proportion between the nature and extent of the attachment and the purpose which is sought to be served by ordering it. Moreover, the
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR words embodied in sub-section (1) of section 83, as interpreted above, would leave no manner of doubt that while ordering a provisional attachment the Commissioner must in the formation of the opinion act on the basis of tangible material on the basis of which the formation of opinion is based in regard to the existence of the statutory requirement. While dealing with a similar provision contained in section 45 (section 45(1) provides as follows):
"45. Provisional attachment.--(1) Where during the tendency of any proceedings of assessment or reassessment of turnover escaping assessment, the Commissioner is of the opinion that for the purpose of protecting the interest of the Government revenue, it is necessary so to do, he may by order in writing attach provisionally any property belonging to the dealer in such manner as may be prescribed.") of the Gujarat Value Added tax Act, 2003, one of us (Honourable M.R. Shah, J.) speaking for a Division Bench of the Gujarat High Court in Vishwanath Realtor v. State of Gujarat [(2015) 5 VST-OL 16 (Guj); 2015 SCC OnLine Guj 6564.] observed (page 24 in 5 VST- OL) : SCC OnLine Guj paragraph 26) '26. Section 45 of the VAT Act confers powers upon the Commissioner to pass the order of provisional attachment of any property belonging to the dealer during the pendency of any proceedings of assessment or reassessment of turnover escaping assessment. However, the order of provisional attachment can be passed by the Commissioner when the Commissioner is of the opinion that for the purpose of protecting the interest of the Government Revenue, it is necessary so to do. Therefore, before passing the order of provisional attachment, there must be an opinion formed by the Commissioner that for the purpose of protecting the interest of the Government Revenue during the pendency of any proceedings of assessment or reassessment, it is necessary to attach provisionally any
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR property belonging to the dealer. However, such satisfaction must be on some tangible material on objective facts with the Commissioner. In a given case, on the basis of the past conduct of the dealer and on the basis of some reliable information that the dealer is likely to defeat the claim of the Revenue in case any order is passed against the dealer under the VAT Act and/or the dealer is likely to sale his properties and/or sale and/or dispose of the properties and in case after the conclusion of the assessment/reassessment proceedings, if there is any tax liability, the Revenue may not be in a position to recover the amount thereafter, in such a case only, however, on formation of subjective satisfaction/opinion, the Commissioner may exercise the powers under section 45 of the VAT Act'."
52. It is evident from the facts noted above that the order of provisional attachment was passed before the proceedings against the appellant were initiated under section 74 of the HPGST Act. Section 83 of the Act requires that there must be pendency of proceedings under the relevant provisions mentioned above against the taxable person whose property is sought to be attached. We are unable to accept the contention of the respondent that merely because proceedings were pending/concluded against another taxable entity, that is, GM Powertech, the powers of section 83 could also be attracted against the appellant. This interpretation would be an expansion of a draconian power such as that contained in section 83, which must necessarily be interpreted restrictively. Given that there were no pending proceedings against the appellant, the mere fact that proceedings under section 74 had concluded against GM Powertech, would not satisfy the requirements of section 83. Thus, the order of provisional attachment was ultra vires section 83 of the Act.
53. On March 1, 2021, the appellant has filed an appeal under section 107 together with a deposit of Rs. 32,15,488 representing
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR ten per cent. of the tax due. Section 107(6) contains the following stipulation:
"107. (6) No appeal shall be filed under sub-section (1), unless the appellant has paid--
(a) in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and
(b) a sum equal to ten per cent. of the remaining amount of tax in dispute arising from the said order, in relation to which the appeal has been filed."
Sub-section (7) stipulates that:
"107. (7) Where the appellant has paid the amount under sub-section (6), the recovery proceedings for the balance amount shall be deemed to be stayed."
54. Clause (a) of sub-section (6) provides that no appeal shall be filed without the payment in full, of such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order as is admitted. In addition, under clause (b), ten per cent of the remaining amount of tax in dispute arising from the order has to be paid in relation to which the appeal has been filed. Upon the payment of the amount under sub-section (6) the recovery proceedings for the balance are deemed to be stayed. Thus, in any event, the order of provisional attachment must cease to subsist. The appellant, having filed an appeal under section 107, is required to comply with the provisions of sub-section (6) of section 107 while the recovery of the balance is deemed to be stayed under the provisions of sub- section (7). As observed hereinabove and under section 83, the order of provisional attachment may be passed during the pendency of any proceedings under section 62 or section 63 or section 64 or section 67 or section 73 or section 74. Therefore, once the final order of assessment is passed under section 74 the order of provisional attachment must cease to subsist. Therefore, after the final order under section 74 of the HPGST Act was passed on February 18, 2021, the order
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR of provisional attachment must come to an end.'
11. The said judgment which was passed while dealing with identical provisions under the CGST Act, 2017 and Rules made there under was followed by this court in the context of section 281B of the I.T. Act by this court in Indian Minerals Case [Indian Minerals and Granite Co. v. Deputy Commissioner of Income-tax, (2022) 440 ITR 292 (Karn); 2021 SCC OnLine Kar 15952.] , wherein it was held as under (page 299 in 440 ITR):
'8. As held by the apex court in the aforesaid decision, mere apprehension on the part of the respondents that huge tax demands are likely to be raised on completion of assessment is not sufficient for the purpose of passing a provisional order of attachment. It has also been held that apart from the fact that a writ petition under article 226 of the Constitution of India challenging the provisional attachment order was maintainable, having regard to the fact that the provisional attachment order of a property of a taxable person including the bank account of such person is draconian in nature and the conditions which are prescribed by the statute for the valid exercise of power must be strictly fulfilled, the exercise of power for order of provisional attachment must necessarily be preceded by formation of an opinion by the authorities that it is necessary to do so for the purpose of protecting the interest of Government revenue. Before the order of provisional attachment, the Commissioner must form an opinion on the basis of the tangible material available for attachment that the assessee is not likely to fulfil the demand payment of tax and it is therefore necessary to do so for the purpose of protecting the interest of the Government revenue. In addition to the aforesaid mandatory requirements, before passing the provisional attachment order, it is also incumbent upon the authorities to come to a conclusion based on the tangible material that without attaching the provisional attachment, it
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR is not possible in the facts of the given case to protect the revenue and that the provisional attachment order is completely warranted for the purpose of protecting the Government revenue.
9. Applying the principles laid down in Radha Krishan's case [Radha Krishan Industries v. State of Himachal Pradesh, (2021) 88 GSTR 228 (SC); (2021) 6 SCC 771;
2021 SCC OnLine SC 334.] to the facts of the instant case, a perusal of the impugned provisional attachment order will clearly indicate that except for merely stating that since there is a likelihood of huge tax payments to be raised on completion of assessment and that for the purpose of protecting the revenue, it is necessary to provisionally attach the fixed deposit of the petitioners, the other mandatory requirements and pre-condition as laid down by the apex court have neither been complied with nor fulfilled or followed prior to passing the impugned order. It is apparent that the impugned provisional attachment orders at annexures D, D1, D2 and D3 do not satisfy the legal requirements as laid down in Radha Krishan's case [Radha Krishan Industries v. State of Himachal Pradesh, (2021) 88 GSTR 228 (SC); (2021) 6 SCC 771;
2021 SCC OnLine SC 334.] and consequently, in view of the fact that the impugned provisional orders are cryptic, unreasoned, non-speaking and laconic, the same deserve to be quashed.
10. In so far as the apprehension of the respondents that in the event huge tax payments are to be raised as against the petitioners-assessee, the assessee may not make payment of the same causing loss to the revenue is concerned, in the light of the undisputed fact that the proceedings under section 153A of the said Act of 1961 have already been initiated coupled with the fact that section 281 of the said Act of 1961, contemplates that any alienation of any property belonging to the petitioners would be null and void, in addition to the specific
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR assertion made by the petitioner that they own and possess immovable property to the tune of more than Rs. 300 crores, the said apprehension of the respondents is clearly unfounded and without any basis and consequently, the said apprehension of the respondents cannot be accepted'.
12. In the instant case, a perusal of the impugned order will clearly indicate that the same is arbitrary and reflects premeditated conclusion without recording either an opinion or necessary to attach the property; the doctrine of proportionality which is implicated in the purpose and necessity of provisional attachment mandates the existence of a proximate or a live link between the need for the attachment and the purpose which it is intended to secure.
13. Further, mere apprehension that huge tax demands are likely to be raised on completion of assessment is not sufficient for the purpose of passing a provisional attachment order and the exercise of the same must necessarily be preceded by the formation of an opinion that it was necessary to do so for the purpose of protecting the interest of Government revenue, that too on the basis of tangible material that the petitioner was not likely to fulfil the demand and on the other hand, was likely to defeat the demand, which is conspicuously missing and absent in the impugned order.
14. The impugned order also discloses that the same has been passed mechanically and is based on borrowed satisfaction and does not meet the test of formation of an opinion of the assessing officer who seems to have been influenced by the findings of the Investigation Wing and TPO and have not independently formed an opinion on the likely additions to be made during assessment proceedings.
15. As stated supra, in the light of existence of a legal mandatory pre- requirement and precondition of recording of formation of opinion which is in pari materia with 'reasons to believe' in section 281B of the
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR I.T. Act, it was incumbent upon the first respondent to arrive at his own satisfaction and not borrowed satisfaction by proper application of mind and consequently, the impugned order which is bald, vague, cryptic, laconic, unreasoned and non-speaking order deserves to be set aside, particularly having regard the undisputed fact that except for stating that he was of the opinion that it was necessary to attach the fixed deposits for the purpose of protecting the interest of the revenue, no other reasons have been assigned by the first respondent in the impugned order.
16. A perusal of the impugned order will also indicate that there is no finding recorded as to why a provisional order of attachment had to be passed against the petitioner; it is significant to note that there is no finding recorded by the first respondent that the petitioner was a 'fly by night operator' from whom it was not possible to recover the likely demand. The impugned order also does not state that the petitioner was either a habitual defaulter nor that he was not doing any business at all or that the petitioner did not have sufficient funds to satisfy the demand. In other words, in the absence of any reasons as to why and how the demand would be defeated by the petitioner, mere apprehension that huge tax demands are likely to be raised on completion of assessment was not sufficient to constitute formation of opinion and existence of proximate and live link for the purpose and necessity of provisional attachment which implicate the doctrine of proportionality. Under these circumstances also, I am of the considered opinion that the impugned order deserves to be quashed."
9.10 On perusal of the entire material on record, we are satisfied that the said independent arrival of opinion that there was a reason to believe is not found forthcoming from the order issued blocking the
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR said credit and it is entirely based on the satisfaction of another officer; it is quite possible that the transaction, when entered into in 2017 or 2018 could be genuine and when the officer visits in 2020 or 2021, the business could have been closed and therefore the mere closure of business in 2020 or 2021 cannot be a basis for denying credit availed earlier. All these factors required that the respondents-revenue ought to have carefully considered and verified all aspects before taking such a drastic action of blocking credit under rule 86A which is yet another circumstance that would vitiate the impugned order.
9.11 The aforesaid facts and circumstances are sufficient to come to the unmistakable conclusion that in the absence of valid nor sufficient material which constituted "reasons to believe" which was available with respondents, the mandatory requirements/prerequisites/ingredients/parameters contained in rule 86A had not been fulfilled/satisfied by the respondents-Revenue who were clearly not entitled to place reliance upon borrowed satisfaction of another officer and pass the impugned orders illegally and arbitrarily blocking the ECL of the appellant by invoking rule 86A which is not only contrary to law but also the material on record and consequently, the impugned orders deserve to be quashed.
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR Point No. 2 is also accordingly answered in favour of the appellants by holding that the respondents-revenue committed a grave and serious error/illegality/infirmity in passing the impugned orders blocking the Electronic Credit Ledgers of the appellants by invoking rule 86A of the CGST Rules."
8. If the impugned order and notice / endorsement are examined bearing in mind the principles laid down in the aforesaid judgment, it is clear that the respondents have not recorded reasons to believe as to why he was issuing the Notice / Endorsement or the impugned order.
9. Under these circumstances, the Notice / Endorsement and the impugned order not only being contrary to the principles laid down by the Division Bench of this Hon'ble Court as well as violative of principles of natural justice being unreasoned cryptic, laconic and non-speaking, I am of the considered opinion that the same deserves to be set aside and necessary directions be issued to the respondents to unblock the Electronic Credit Ledger subject to certain conditions.
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR
10. Insofar as the contention urged by learned counsel for the respondents as regards availability of alternative remedy by way of an appeal is concerned, in the light of the finding recorded by me hereinbefore that the impugned order and the notice / endorsement are violative of principles of natural justice being an unreasoned cryptic, laconic and non-speaking and contrary to the principles laid down in the aforesaid judgment mere availability of alternative remedy by way of an appeal will not come in the way of this Court exercising its jurisdiction under Article 226 of the Constitution of India and as such, this contention cannot be accepted.
11. It is also relevant to state that in the event, petitioner would have to file an appeal against the impugned order, he would necessarily have to make a pre-deposit of 10% of the demand made in the impugned order in terms of Section 107(6) of GST Act and as such, in order to balance equities, it would be necessary to reserve liberty in favour of the respondents to issue a fresh notice and proceed further by directing the respondents to unblock the Electronic Credit Ledger subject to the petitioner maintaining a
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR minimum of 10% of the tax amount balance in the Electronic Credit Ledger as demanded in the impugned order.
12. In the result, I pass the following:
ORDER
(i) The petition is hereby allowed.
(ii) The impugned order at Annexure - A dated 06.03.2025 and Notice / Endorsement dated 28.02.2025 are hereby set aside and the Electronic Credit Ledger of the petitioner is directed to be unblocked forthwith, immediately without any delay.
(iii) Liberty is reserved in favour of the respondents to issue a fresh notice to the petitioner and proceed further, in accordance with law within a period of one month from the date of receipt of a copy of this order.
(iv) Petitioner is further directed to maintain 10% of the tax demand balance in its Electronic Credit Ledger as demanded in the impugned order.
(v) It is further made clear that the present order is passed without prejudice to the rights and contentions of the parties in the proceedings already initiated by the respondent
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NC: 2025:KHC:29928 WP No. 8261 of 2025 HC-KAR against the petitioner under Sections 73 and 74 of the KGST Act, which shall proceed, in accordance with law.
Sd/-
(S.R.KRISHNA KUMAR) JUDGE SV List No.: 1 Sl No.: 22