State of Karnataka Vs K-9-Enterprises

The Supreme Court (SC) of India, in the case titled State of Karnataka & Anr. vs. K-9 Enterprises, upheld the Karnataka High Court's (HC) ruling concerning the procedural requirements under Rule 86A of the CGST Rules, 2017. K-9 Enterprises, which deals in lead and lead scrap, faced a blockage of its Electronic Credit Ledger (ECL) based on a field visit report that suggested some of its suppliers were non-existent. The central legal contention revolved around the lack of a pre-decisional hearing, which K-9 Enterprises argued breached principles of natural justice, emphasizing the importance of giving an assessee an opportunity to be heard before imposing drastic actions like ECL blockage. The Karnataka HC ruled that the authorities must establish a well-founded “reason to believe” that the ITC was fraudulently availed or ineligible, relying not solely on reports but on independent verification. The court emphasized that blocking an ECL carries severe civil consequences and that officials must carefully assess material evidence before taking action. Following these observations, the High Court quashed the orders blocking K-9 Enterprises' ECL. Subsequently, the revenue authorities filed a Special Leave Petition (SLP) challenging this decision, which the SC dismissed. The SC reaffirmed the necessity of procedural fairness and a robust evidentiary basis before blocking taxpayer rights, thereby reinforcing the requirement for independent evaluation and a fair hearing. This case illustrates the significant judicial reinforcement of procedural justice and the safeguards required in the interpretation of administrative powers under GST regulations.