The Karnataka High Court addressed a case involving M/s. Sri Padmavathi Marketing, whose Input Tax Credit (ITC) of ₹1.96 crore was blocked following a show cause notice. The notice alleged fraudulent transactions with its customer, M/s. Million Lights, claiming invoices were issued without actual supply, which purportedly led to wrongful ITC availment by the customer. The petitioner contended that it had properly paid the output tax and had not fraudulently availed any ITC. Despite this, the department invoked Rule 86A to block the petitioner’s ITC, citing alleged irregularities by the recipient.

The key issue was whether Rule 86A could be applied against a supplier when the alleged wrongful ITC availment was by the recipient. The Court clarified that Rule 86A is applicable only when the taxpayer himself has fraudulently availed or is ineligible for ITC, not for actions by third parties. The allegations were directed at the customer, not the petitioner’s own ITC claim. Consequently, the Court found that blocking the petitioner’s ITC without meeting the conditions under Rule 86A was beyond jurisdiction and legally invalid.

Read More: Madras High Court : Demand order exceeding the amount proposed in the Show Cause Notice violates Section 75(7) and is legally impermissible [Order attached]

As a result, the Court quashed the show cause notice and ordered the immediate unblocking of the petitioner’s electronic credit ledger, providing relief to M/s. Sri Padmavathi Marketing.