The Lead Factory vs Assistant Commissioner Of Commercial … on 1 August, 2025

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Karnataka High Court

The Lead Factory vs Assistant Commissioner Of Commercial … on 1 August, 2025

Author: S.R.Krishna Kumar

Bench: S.R.Krishna Kumar

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                    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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    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.

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(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
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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.

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(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
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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
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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
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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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



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