The Punjab and Haryana High Court addressed a case involving M/s K.R. Steels, M/s Balaji Metals, and M/s Jindal Traders against the State of Haryana concerning the blocking of their electronic credit ledgers under Rule 86A of the CGST Rules, 2017. The petitioners, engaged in trading iron and steel, faced blockage of substantial input tax credit (ITC) amounts based on allegations of fraudulent or ineligible ITC claims. They argued that the orders lacked proper justification and were issued without a hearing, violating their constitutional rights under Articles 14 and 19(1)(g).
The Court examined whether the blocking of ITC was conducted with valid "reasons to believe," as required by Rule 86A. It found that the orders merely echoed the rule's language without substantive evidence or satisfaction, thus violating natural justice principles. Additionally, the Court noted that Rule 86A(3) limits such restrictions to one year, yet the blockage extended beyond this period without review, rendering it unlawful.
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Referring to previous judgments, the Court emphasized that Rule 86A should be applied sparingly and with documented reasoning. Consequently, the Court ordered the immediate unblocking of the petitioners' electronic credit ledgers unless new valid reasons were documented. The petitions were allowed, and the blocking orders were quashed, with no costs imposed.
Order date: 04 Nov 2025
Parties: M/s K.R. Steels, M/s Balaji Metals & M/s Jindal Traders v. State of Haryana & Ors.
Facts –
- The petitioners are registered taxpayers engaged in trading of iron and steel under the CGST Act, 2017 and HGST Act, 2017.
- In each case, the electronic credit ledger (ECL) of the petitioner was blocked under Rule 86A of the CGST Rules, 2017 on the allegation that the input tax credit (ITC) was availed fraudulently or was ineligible.
- The blockage covered substantial ITC amounts—₹34.43 lakh (CWP 23675/2025), ₹67.82 lakh (CWP 29809/2025), and ₹16.49 lakh (CWP 19005/2025)—based on departmental communications dated between December 2024 and September 2025.
- The petitioners argued that the orders lacked recorded reasons to believe, were passed mechanically, and no opportunity of hearing was afforded.
- They further contended that Rule 86A(3) limits the effect of such restriction to one year, but the Department continued to retain the block beyond that period without review or intimation.
Issue –
- Whether the blocking of ITC under Rule 86A of the CGST/HGST Rules, 2017 without proper satisfaction or adherence to statutory procedure violates the taxpayer’s right under Article 14 and 19(1)(g) of the Constitution?
Order –
- The Court noted that Rule 86A(1) requires the Commissioner or authorized officer (not below Assistant Commissioner rank) to have “reasons to believe” that ITC has been fraudulently availed or is ineligible, based on objective material.
- In the present case, no such satisfaction was recorded; the blocking orders merely reproduced the rule’s wording without substantive justification.
- The Court further observed that Rule 86A(3) provides that restriction automatically ceases after one year, and thus continuing to block credit beyond that is without jurisdiction.
- Referring to M/s Dee Vee Projects Ltd. V. Union of India (2023) and M/s Calcutta Steel Traders v. State of Haryana (2024), the Court reiterated that Rule 86A must be exercised sparingly and with reasoned satisfaction.
- Accordingly, the Bench directed the Department to unblock the petitioners’ electronic credit ledgers forthwith, unless fresh valid reasons are recorded in writing.
