Cancellation of GST Registration valid where ITC is based on fabricated documents and absence of proof of movement of goods

The Hon’ble Madras High Court in the case of Tvl. Sri Balajee Udyog Represented by its Proprietor Sanjay Mittal Versus The Assistant Commissioner (ST), The Deputy Commissioner (ST) (FAC) GST Appeal, Chennai-I, Chennai - 2026 (4) TMI 1348 - MADRAS HIGH COURT held that cancellation of GST registration under Section 29(2)(a) is valid where the assessee fails to produce evidence of actual movement of goods and claims ITC based on inadequate and unsubstantiated documents, despite being given opportunity of hearing.

Facts:

Tvl. Sri Balajee Udyog (“the Petitioner”) is a proprietorship concern registered under GST on April 05, 2022, claiming Input Tax Credit (ITC) on purchases.

The Assistant Commissioner (ST) & Ors. (“the Respondent”) conducted inspection of the Petitioner’s premises, issued show cause notice dated November 14, 2024 seeking proof of actual movement of goods, and subsequently cancelled the GST registration vide order dated November 29, 2024, which was upheld in appeal and writ proceedings.

The Petitioner contended that sharing of business premises with another entity does not justify cancellation; mere co-location without evidence of overlapping business activity or financial nexus cannot satisfy Section 29(2) of the CGST Act, 2017 or Rule 21 of CGST Rules. It was argued that blocking ITC without adjudication under Sections 73 or 74 is arbitrary and violative of Article 19(1)(g) of the Constitution.

The Respondent contended that the Petitioner claimed ITC of Rs.18.62 crores but failed to produce proof of physical movement of goods such as freight charges, lorry receipts, or transport documents; mere e-way bills are insufficient. The Petitioner failed to satisfy Section 16(2)(b) requirements, and ITC was availed on fabricated invoices, warranting cancellation to prevent misuse.

Aggrieved by cancellation of registration, confirmation in appeal, and dismissal of writ petition, the Petitioner filed the present writ appeal challenging the legality of cancellation under Section 29 of the GST Act.

Issue:

Whether cancellation of GST registration under Section 29(2)(a) is valid in the present facts and circumstances?

Held:

The Hon’ble Madras High Court in Tvl. Sri Balajee Udyog Represented by its Proprietor Sanjay Mittal Versus The Assistant Commissioner (ST), The Deputy Commissioner (ST) (FAC) GST Appeal, Chennai-I, Chennai - 2026 (4) TMI 1348 - MADRAS HIGH COURT held as under:

• Observed that, inspection revealed that the premises was not sufficient for carrying out business to justify huge ITC claims.
• Noted that, despite opportunity, the Petitioner failed to produce documents evidencing actual movement of goods such as freight charges, lorry receipts, and loading/unloading charges.
• Observed that, mere production of print-outs of e-way bills is inadequate to establish genuine transactions or physical movement of goods.
• Noted that, ITC was claimed on invoices alleged to be fabricated and action had been initiated against suppliers under Rule 86A and Section 74 of the GST Act.
• Observed that, when there is material available to show that the benefit of ITC claimed is based on fabricated documents and fake invoices, cancellation of registration is the best action to prevent further fake claims.
• Observed that, the Constitution guarantees only genuine and honest trade and not illegal and fake trade intended to cheat the revenue of the State.
• Noted that, adequate opportunity was given to the Petitioner and failure to establish movement of goods amounts to contravention of the GST Act.
• Held that, cancellation of registration under Section 29(2)(a) was valid and the order of the Single Judge dismissing the writ petition was affirmed.

Our Comments:

The judgment proceeds on the premise that failure to establish “actual movement of goods” disentitles the assessee from ITC under Section 16(2)(b) and justifies cancellation under Section 29(2)(a). The Court specifically relies on the absence of transport-related documents and treats e-way bills as insufficient proof. It also records that proceedings under Rule 86A and Section 74 have been initiated, thereby indicating parallel statutory remedies. The reasoning aligns with the statutory requirement that ITC is contingent upon receipt of goods and genuine transactions. The Court treats cancellation as a preventive mechanism where ITC is found to be based on fabricated documents.

Relevant Provisions:

Section 29(2)(a) of the CGST Act, 2017:

“29. Cancellation or suspension of registration.-

(2) The proper officer may cancel the registration of a person from such date, including any retrospective date, as he may deem fit, where,-

(a) a registered person has contravened such provisions of the Act or the rules made thereunder as may be prescribed; or

…”

 (Author can be reached at [email protected])