Must You Be Heard Before the Ledger Is Blocked?

Blocking happens without warning. That is the design: Rule 86A exists so that credit can be frozen before it is used, and a power which required notice first would be worth very little to the revenue.

The question the High Courts have divided on is whether the design can be pressed that far. Must the taxpayer be heard before the ledger is blocked, or is it enough that he can be heard afterwards?

It matters practically, because it is often the only ground available. Where the reasons are recorded and the material is real, the absence of a hearing may be the single defect on the file.

Karnataka: the hearing must come first

K-9 Enterprises v. State of Karnataka, WA 100430 of 2023 and connected appeals, decided by a Division Bench on 2 April 2024, is the leading decision.

The facts are ordinary, which is what makes it useful. The appellants were registered dealers 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 the hearing, the conclusion was unqualified:

we are of the considered opinion that the learned Single Judge clearly fell in error in coming to the conclusion that a pre-decisional hearing was not required to have been provided/granted to the appellants by the respondents-revenue prior to passing the impugned orders blocking the ECL of the appellants

The answer to "but it is an emergency"

The strength of the Karnataka reasoning is not the assertion that natural justice applies. It is the answer it gives to the obvious objection — that a power which must be announced in advance is no power at all, because the taxpayer will simply use the credit first.

The Court met that on the facts of how credit actually works:

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the appellants utilizing/availing the ITC is not instantaneous/immediate unlike bank accounts, from which monies can be withdrawn, if the same are not attached and the said process culminating in the ITC being converted to actual benefit in favour of the appellants would consume time ...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

That is the hinge, and it is a factual proposition rather than a legal one. Credit in a ledger is not money in a bank account. It is discharged against a liability when a return is filed, which takes time and leaves a trail. The urgency that would justify acting without notice is, on this reasoning, largely absent.

And the Court did not leave the revenue without a remedy. It said in terms that having issued a notice proposing to invoke Rule 86A, the department

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 Karnataka rule is narrower than it is often stated. It is not that blocking must wait for a hearing to finish. It is that the process must begin with notice, and the department may still act during it where circumstances warrant.

Delhi: an emergent power needs no prior notice

The Delhi High Court reasoned from the nature of the power rather than from the mechanics of the ledger. In Best Crop Science (P) Ltd v. Principal Commissioner, CGST, W.P.(C) 10980 of 2024, decided 24 September 2024 with Kay Kay Overseas Corporation and connected petitions, the petitioners' complaint was that the rule does not permit blocking credit which is not in the ledger at all — the negative blocking question, taken up separately in this series. In the course of deciding it 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.

Bombay: agreement, though the case turned on something else

Elitecon International Ltd v. Union of India, WP 4899 of 2025, was decided by the Bombay High Court on 25 March 2026, and needs to be read for what it decided as well as what it said.

The facts: a search of the petitioner's premises on 12 February 2025; summons to its director about purchases and credit taken from one supplier; a DGGI investigation into the same subject matter already running since February 2022; the bank accounts provisionally attached on 27 February 2025; and the credit ledger blocked on 7 March 2025.

On the hearing question the Court was emphatic, after setting out the K-9 passages at length:

We are in complete agreement with the aforesaid view of the Karnataka High Court.

But the order rested on a different ground. Counsel had restricted the prayer to Rule 86A(3), and what the Court held was that blocking beyond one year is against the mandate of the rule — the year having expired on 7 March 2026. The attachment was quashed and the ledger unblocked on that footing.

The distinction is worth keeping straight. Bombay's agreement with Karnataka on the pre-decisional hearing is a considered expression of view by a Division Bench, and citable as such. It is not the ratio of the case. A reply which presents it as Bombay having decided the hearing point invites a correction that costs more than the citation was worth.

What this means for a reply

Establish which line binds the officer. The question is still open enough that the answer is geographic.

Where the Karnataka view is available, plead the mechanics, not just the principle. The argument that carried K-9 is that credit cannot be encashed like a bank balance. That is capable of being demonstrated on your own facts — the return cycle, the liability it would be set against, the time it would take.

Do not overstate the rule. K-9 permits the department to monitor and to block during the process where circumstances warrant. The defect it condemns is blocking with no notice and no process at all.

Expect the post-decisional answer. The department's position, recorded in Elitecon International, is that no personal hearing is required before the order and that a post-decisional or remedial hearing is always available. Meet it with the Rule 86A(2) application you have already made.

Watch the emergency argument cut the other way. Delhi dispenses with prior notice because the power is temporary and emergent. A block left in place for months, or past the year Rule 86A(3) allows, is harder to defend on that very reasoning — which is, in substance, what happened in Elitecon International.

In short

1. Find out which High Court's view binds the officer. Karnataka requires a pre-decisional hearing; Delhi holds no prior notice is needed; Bombay has expressed complete agreement with Karnataka while deciding on another ground.
2. Lead on the mechanics where you can. Credit is not cash, it cannot be withdrawn instantly, and that is what answers the emergency argument.
3. State the Karnataka rule accurately. Notice must start the process; the department may still act during it if circumstances warrant.
4. Cite Elitecon International for what it is — agreement with Karnataka, in a case decided on the one-year expiry.
5. Plead the civil consequences as fact, with figures. Output tax now payable in cash, working capital diverted, a liability falling due while the credit sits frozen.
6. Turn the emergency reasoning around where the block has sat for months doing nothing.

This is the third note in a series on Rule 86A. The first set out what the rule requires before credit can be blocked; the second, the reasons to believe requirement. The next takes up negative blocking — the question actually decided in Best Crop Science, where the division between the High Courts is sharper still.

This note is general information drawn from reported decisions and is not advice upon any particular matter. The lines of authority described above subsist alongside one another, and the outcome in any case depends upon its own record.