Reasons to Believe: Where the Blocking Order Fails

Rule 86A turns on four words. The officer may block the ledger where he "has reasons to believe" that the credit was fraudulently availed or is ineligible. Everything else in the rule is machinery; this is the condition.

It is also where almost every successful challenge is won. Of the judgments on this database that genuinely turn on Rule 86A, naming it five times or more, the overwhelming majority are decided on whether the officer had reasons to believe at all — not on whether the supply was genuine, and not on the merits of the credit.

The expression is borrowed, and it carries its history

"Reasons to believe" is not new vocabulary. It runs through the reassessment provisions of the Income-tax Act and through provisional attachment, and the courts have read it into Rule 86A with that history attached.

The Karnataka High Court has treated it as requiring two things, not one. The formulation appears repeatedly in that Court, and Lawraga Metals (P) Ltd v. State of Karnataka, WP 33411 of 2025, decided 21 November 2025, states it in the course of reversing a Single Judge. The petitioner there had two orders against it, both dated 16 June 2025, blocking its credit ledger for 2023-24 and for 2024-25:

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 ... 2 pre-requisites/conditions had to be satisfied/fulfilled before invocation of Rule 86A

The two are the existence of material, and the officer's own satisfaction formed upon it. An order can fail on either. Most fail on the second.

What the officer may not do: borrow the inquiry

The commonest defect is also the easiest to find on the face of the order. An alert, an intelligence input or a field report from another formation names a supplier; the officer reads it and blocks.

Lawraga Metals put the objection plainly, on facts worth remembering because they recur:

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.

A field visit by other officers, in another State, finding the supplier absent, is real material. It is still not the blocking officer's satisfaction. The Court went further on what the rule demands of him:

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

Three things are packed into that passage and each is usable separately. The power is drastic and draconian, so it is to be construed strictly. An investigation report alone will not carry an order. And the onus is on the revenue to show deliberate availment — not on the taxpayer to disprove it.

What a failing order looks like

The Division Bench in K-9 Enterprises v. State of Karnataka, WA 100430 of 2023, decided 2 April 2024, was dealing with dealers in lead and lead scrap whose ledgers had been blocked on 27 June 2023 over purchases from registered suppliers. It described the orders in a string of adjectives that has since been quoted repeatedly:

the impugned order which is bald, vague, cryptic, laconic, unreasoned and non-speaking order deserves to be set aside

That sentence is a serviceable checklist. Read the blocking order and ask, of each clause, whether it could have been written by someone who had not seen your file. If the whole order could have been, it answers the description.

The Court also recorded what was missing, which is the more useful test:

in the absence of valid nor sufficient material which constituted 'reasons to believe' which was available with respondents, the mandatory requirements/pre-requisites/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

Valid and sufficient material, and the officer's own satisfaction upon it. Those are the two limbs again.

Reasons recorded, and reasons communicated

Rule 86A(1) requires the officer to act "for reasons to be recorded in writing". Two distinct failures follow from that and they are worth separating in a reply.

The first is that no reasons exist. The file shows a decision and no recorded basis for it. That is the clearest case.

The second is subtler and far more common: reasons exist somewhere on the file but were never communicated, so the taxpayer learns the basis of the block for the first time from a counter affidavit. A reply that treats these as the same point concedes ground unnecessarily. Ask for the reasons recorded under Rule 86A(1) by name, in writing, and note the date of the request. If they arrive only in response to litigation, the sequence is itself the argument.

One honest caution

A note of this kind can easily read as though the ground always succeeds. On the material I have read it very largely does — I have not found a judgment on this database refusing relief on the footing that an officer's reasons were adequate, where the rule was squarely in issue.

That is not the same as saying the ground cannot fail, and two things should temper it. The judgments are heavily concentrated in one Court, which is the subject of a later note in this series. And a line of authority does run the other way on the related question of blocking a ledger that holds nothing — the Allahabad High Court in R.M. Dairy Products LLP v. State of U.P., on an order of 25 June 2021, declined the argument that credit could not be blocked above the balance actually available, holding that the ambit and purpose of Rule 86A are inherently different and independent of the recovery provisions. The Calcutta High Court has taken a similar view. The Bombay High Court went the other way in King Enterprises v. Union of India on 18 November 2025, on facts which show the problem plainly: credit of Rs 7,06,770 stood in the ledger and the order blocked Rs 2.66 crore. That split is taken up separately.

What follows from all of it is narrower than "you will win". It is that the reasons are where the case is, and that the officer's own mind is what the rule asks about.

In short

1. Ask for the reasons recorded under Rule 86A(1), in writing and by name, and date the request.
2. Separate "no reasons" from "reasons never communicated". They are different failures and the second is more common.
3. Identify the source of the satisfaction. If it is an alert, a field report or another formation's conclusion, that is borrowed inquiry on Lawraga Metals.
4. Hold the order against the adjectives. Bald, vague, cryptic, laconic, unreasoned, non-speaking — the language of K-9 Enterprises, and an order that fits is vulnerable.
5. Put the onus where the Court put it. It is for the revenue to show deliberate availment of fraudulent or ineligible credit.
6. Do not argue the genuineness of the supply first. It is the harder case and it is not what the rule asks at this stage.

This is the second note in a series on Rule 86A. The first set out what the rule requires before credit can be blocked. The next takes up the question the High Courts have divided on: whether you must be heard before the ledger is blocked at all.

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.