The Hearing the Council Has Offered on Blocked Credit

On 8 October 2026 the GST Council met for the fifty-seventh time and recommended, among a great deal else, that Rule 86A be amended. The Press Information Bureau put it in one sentence:

Amendment in rule 86A of the CGST Rules, 2017 to provide for opportunity of being heard to the taxpayer: The GST Council recommended amendment in rule 86A of the CGST Rules, 2017 to provide a mechanism for enabling a taxpayer to file an objection against blocking of any amount in electronic credit ledger and to avail a personal hearing before the proper officer takes a decision on such objection.

That reads like a concession, and in part it is one. Rule 86A at present says nothing whatever about a hearing. It lets the Commissioner, or an officer authorised by him not below the rank of Assistant Commissioner, disallow debit from the electronic credit ledger where he has reasons to believe that credit has been fraudulently availed or is ineligible. Sub-rule (2) lets him allow the debit again on being satisfied that the conditions no longer exist. Sub-rule (3) stops the restriction after a year. Nowhere is the taxpayer given a right to be heard at any stage.

So a rule which provided for no hearing will now provide for one. That is worth having.

But read the sentence again, because the sequence in it is the whole point. The taxpayer may file an objection against blocking — which means the blocking has already happened. He may have a personal hearing before the proper officer takes a decision on such objection — which means the hearing attaches to the objection, not to the block.

That is a post-decisional hearing. And the line of authority built up in the High Courts over the last two and a half years holds that a post-decisional hearing is not enough.

What the Karnataka Bench actually decided

K-9 Enterprises v. State of Karnataka, Writ Appeal No. 100430 of 2023 and connected appeals, was decided by a Division Bench of the Karnataka High Court on 2 April 2024.

The facts are deliberately unremarkable. The appellants dealt in lead and lead scrap. They bought from suppliers who were themselves registered under GST, took credit on those purchases, and the credit sat in their electronic credit ledgers. On 27 June 2023 the ledgers were blocked under Rule 86A. The Single Judge upheld the blocking. The Division Bench reversed, on two grounds — that the officer had not formed his own reasons to believe, and that the appellants had not been heard before the block.

On the hearing the Court was unqualified:

principles of natural justice necessarily had to be observed and adhered to by the respondents revenue before passing the impugned orders blocking the ECL of the appellants which would entail and visit them with serious civil consequences; so also, in the absence of extraordinary reasons or exceptional circumstances obtaining from the material available with them which would obviate or dispense with the requirement of pre-decisional hearing, it was also incumbent upon the respondents-revenue to provide/grant a pre-decisional hearing to the appellants before invoking Rule 86A

What carried it was not the bare assertion that natural justice applies. It was the answer the Court gave to the obvious objection — that a power which must be announced in advance is no power at all, because the taxpayer will simply spend the credit first:

the said process of the appellants utilizing/availing the ITC is not instantaneous/immediate unlike bank accounts, from which monies can be withdrawn, if the same are not attached and the said process culminating in the ITC being converted to actual benefit in favour of the appellants would consume time ... in other words, it was not physically possible for the appellants to immediately/forthwith encash/withdraw the ITC available in its ECL so as to warrant emergent/urgent blocking of the ECL without providing a pre-decisional hearing

Credit in a ledger is not money in a bank account. It is set against a liability when a return is filed, which takes time and leaves a trail. That is a factual proposition, not a legal one, and the whole edifice rests on it.

The Court did not leave the department without a remedy. Having issued a notice proposing to invoke Rule 86A, the revenue

would be entitled to supervise/monitor the proceedings including the ECL of the appellants and if circumstances so warrant, respondents-revenue would be entitled to block the ECL even before completion of pre-decisional hearing

So the rule is narrower than it is usually stated. Blocking need not wait for the hearing to finish. The process must begin with notice.

What the Supreme Court did, and what it did not do

The Revenue carried K-9 to the Supreme Court. In State of Karnataka v. K-9 Enterprises, the Court on 16 May 2025 dismissed the special leave petitions. The order runs, in full:

There is a delay of 243 days in filing the Special Leave Petitions which has not been satisfactorily explained. Even otherwise, we have gone through the Special Leave Petition and do not find any merit in the same. The Special Leave Petitions are, therefore, dismissed on the ground of delay as well as on merits.

It is reported at (2025) 30 Centax 281 (SC) and [2025] 174 taxmann.com 701 (SC).

This is routinely described as the Supreme Court having affirmed K-9. Be careful with that, because the department will be.

A dismissal of a special leave petition is a refusal to grant leave. It is not a judgment on appeal, it does not merge the High Court order into an order of the Supreme Court, and where it is non-speaking it lays down no law under Article 141 — settled since Kunhayammed v. State of Kerala, (2000) 6 SCC 359. A dismissal resting partly on an unexplained delay of 243 days is weaker still as precedent, because the limitation ground is sufficient by itself to dispose of the petition.

What the dismissal does establish is that the Supreme Court, having looked at the matter, declined to disturb the Karnataka view. That is worth a great deal in argument and nothing at all as binding ratio. Pitch it accordingly.

The line spread, and then it drifted

What has happened since is more interesting than the SLP.

The Telangana High Court took the same view within weeks, in Bhavani Oxides v. State of Telangana, Writ Petition Nos. 10390, 10425, 10459 and 12733 of 2024, decided 26 June 2024 by Sujoy Paul and Namavarapu Rajeshwar Rao JJ. The credit had been blocked on the footing that the supplier's registration had been cancelled, without any show cause notice. The Court held that the principles of natural justice must be observed in taking action under Rule 86A, set aside the impugned action in all the petitions, and reserved liberty to the Department to proceed in accordance with law.

The Bombay High Court, in Elitecon International Ltd v. Union of India, Writ Petition 4899 of 2025, decided 25 March 2026, set out the K-9 passages at length and said it was in complete agreement with the Karnataka view. The order, however, rested on Rule 86A(3), the year having run out on 7 March 2026. The agreement is a considered expression of view by a Division Bench. It is not the ratio.

The Madras High Court is sometimes listed with them. It should not be. In V V Iron and Steel Company Private Limited v. Assistant Commissioner, W.P.(MD) 10232 of 2026, decided 5 June 2026, K-9 was cited by the petitioner, and the Court accepted that the power under Rule 86A is drastic and warrants strict scrutiny. But it read the remedy as lying after the block, not before it:

The assessee is entitled to submit a representation seeking revocation of the blockage, and upon such representation, the authority is obliged to consider it and pass a reasoned and speaking order.

Finding adequate material on the file, and rejecting the plea of hardship because the turnover exceeded Rs 400 crore against credit blocked of Rs 4,10,94,906, the Court dismissed the writ petition. A citation search will return it as a case which cites K-9. It is not a case which followed it.

The Jammu and Kashmir and Ladakh High Court went furthest. In NCC Limited v. Union Territory of Jammu and Kashmir, WP(C) 1935 of 2026, decided 12 August 2026, a block of Rs 10,45,38,432 was set aside because no reasons had been recorded and the taxpayer had not been heard:

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

Read into the provision. That is as strong as it gets.

And then, three weeks later, the drift.

In SPL Steel Processors Private Limited v. Commissioner of Revenue, WPA 17279 of 2026, the Calcutta High Court on 1 September 2026 dealt with a block of Rs 4,43,53,116 imposed on 15 June 2026 on the footing that the suppliers were non-existent. The petitioner had asked for a hearing before the decision and had not got one. The Court held there was "no infirmity in the order passed for blocking Electronic Credit Ledger of the petitioner, prima facie", and then:

Principles of audi alteram partem and the principles observed in the judgment of K-9 Enterprises (supra) requires a post decisional hearing.

K-9 Enterprises decided that a pre-decisional hearing was required. Calcutta cited it for the proposition that a post-decisional hearing is required. The writ was disposed of by directing the petitioner to file a representation within two weeks and the officer to dispose of it by a reasoned order, after hearing, by 15 October 2026 — without going into the merits.

Whatever else that is, it is not K-9. It is the model the Council has now recommended.

The Delhi position, which never moved

None of this displaces Best Crop Science (P) Ltd v. Principal Commissioner, CGST, W.P.(C) 10980 of 2024, decided by the Delhi High Court on 24 September 2024, where the Court described the character of the power:

It is not necessary for any proceedings to be initiated against the taxpayer prior to passing an order under Rule 86A(1) of the Rules ... This is clearly an emergent provision, which enables the Commissioner to withhold the available ITC in the ECL, which he has reason to believe has been fraudulently availed or is ineligible. An order under Rule 86A(1) of the Rules does not require a prior show cause notice to be issued to a taxpayer as it is by its very nature an emergent provision.

For anyone practising in Delhi that remains the position of the jurisdictional High Court on prior notice. It is also, as it happens, the position the Council has now chosen to write into the rule.

What the amendment will and will not change

It will give you a hearing you do not presently have. Today there is no provision at all. An officer who blocks and then ignores a Rule 86A(2) application breaches nothing express. After the amendment he will.

It will not answer the K-9 objection. The complaint in K-9 was not that there was no hearing ever. It was that the block took effect before any hearing, with serious civil consequences, in circumstances where the credit could not have been spent overnight anyway. A rule which formalises the objection-and-hearing sequence leaves that complaint exactly where it was.

It may well be argued to displace the objection. Expect the department to say the field is now occupied — that the rule-maker has considered what process is due under Rule 86A and has prescribed it, so nothing further falls to be read in. That argument has force, and it is why this recommendation matters to anyone with a live matter.

The counter is that a rule cannot cut down natural justice by implication. Where the consequence is the freezing of working capital for up to a year, the argument that an express post-decisional remedy ousts a pre-decisional one is not obviously right. But it will have to be made, and it will be made against a rule rather than against a silence, which is a harder place to stand.

And none of it is law yet. The Press Information Bureau release carries its own caveat: the recommendations would be given effect through the relevant circulars, notifications and law amendments, which alone shall have the force of law. Until the notification issues, Rule 86A reads as it always has.

What to do about it now

If your ledger is blocked today, do not wait for the amendment. The law as it stands is the law in K-9 and the decisions which have followed it, and it is better for you than what is coming. A matter argued now is argued on the present rule.

Establish which High Court binds your officer, and plead accordingly. Karnataka, Telangana and Jammu and Kashmir require a hearing before the block. Bombay has expressed complete agreement while deciding on another ground. Calcutta has read the same authority as requiring only a hearing afterwards. Delhi holds no prior notice is needed at all. The answer is still geographic.

Lead on the mechanics, not the principle. What carried K-9 is that credit cannot be encashed like a bank balance. That is capable of demonstration on your own facts — the return cycle, the liability it would have been set against, the time it would have taken.

Cite the SLP dismissal for what it is. The Supreme Court declined to interfere. It did not lay down the law.

Plead the civil consequences with figures. Output tax now payable in cash, working capital diverted, a liability falling due while the credit sits frozen. The Jammu and Kashmir Bench set aside a block of over ten crore; Calcutta was dealing with four and a half. Numbers do the work here.

Watch the one-year limit. Rule 86A(3) stops the restriction after a year, and a block left sitting is harder to defend on the very emergency reasoning which justified imposing it without notice — which is, in substance, what happened in Elitecon International.

In short

1. The Council has recommended a hearing on Rule 86A — an objection against the blocking, and a personal hearing before the objection is decided.
2. That is a post-decisional hearing, and the sequence in the recommendation puts it beyond doubt.
3. K-9 Enterprises required a pre-decisional one, and it did so because credit in a ledger cannot be spent overnight.
4. The Supreme Court dismissed the Revenue special leave petitions on 16 May 2025, on delay of 243 days and on merits. That is a refusal of leave, not a declaration of law — argue it as persuasive, not as binding.
5. The line had spread to Telangana, Bombay and Jammu and Kashmir before Calcutta read it, in September 2026, as requiring only a hearing after the event. Madras is not with them — in V V Iron and Steel it dismissed the writ and read the remedy as a representation after the block.
6. Delhi never moved — Best Crop Science holds the power emergent and prior notice unnecessary.
7. Nothing has changed yet. Until the notification issues the rule reads as before, and a matter argued today is argued on better law than the one coming.

This is the seventh note in a series on Rule 86A. The earlier notes set out what the rule requires before credit can be blocked, the reasons to believe requirement, whether you must be heard before the ledger is blocked, negative blocking, the one-year limit and the Rule 86A(2) application, and where the law on this rule is actually being made.

This note is general information drawn from the Press Information Bureau release of 8 October 2026 and from reported decisions, and is not advice upon any particular matter. The recommendations of the GST Council take effect only through notifications and amendments, which alone have the force of law, and the position stated here may change when they issue.