Section 68 GST Act upheld; writ dismissed as fraudulent ITC scheme exposed, Rs 5 lakh costs imposed

HC upheld the validity and application of Section 68 of the GST Act and related provisions, holding that although procedural lapses occurred in treating the stationed vehicle as "in transit," the petitioner was not entitled to relief. The court found that the petitioner had colluded in a systematic scheme to defraud the revenue by generating fictitious outward liabilities, using bogus entities, and claiming fraudulent input tax credit by exploiting systemic gaps in the GST regime. Observing that equitable relief under Article 226 is discretionary and unavailable to parties with unclean hands, HC dismissed the writ petition and imposed costs of Rs. 5,00,000 on the petitioner-company.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether issuance of order in Form GST MOV-02 and treatment of the consignment as "goods in transit" under Section 68 of the Act of 2017 was lawful when the vehicle had already reached the destination and was stationed at the recipient's premises.

1.2 Whether non-compliance or procedural irregularities in use of prescribed GST MOV forms and Rule 138C of the Rules of 2017 vitiated the detention of goods and conveyance and entitled the petitioner to release of goods/conveyance and consequential reliefs.

1.3 Whether, in the background of prima facie material indicating large-scale bogus input tax credit and evasion, the petitioner was entitled to writ relief, including quashing of proceedings, release of goods/vehicle and compensation, under the discretionary jurisdiction of Article 226 of the Constitution.

1.4 Whether the facts disclosed justified initiation and continuation of proceedings for confiscation and penalty under Section 130 of the Act of 2017 and denial of equitable relief, including imposition of exemplary costs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of treating the consignment as "goods in transit" and issuance of Form GST MOV-02 under Section 68

Legal framework (as discussed)

2.1 The Court referred to Section 68 of the Act of 2017 (inspection of goods in movement) and to Rules 138 to 138C of the Rules of 2017, dealing with e-way bills, documents to be carried, verification and timelines for inspection (report in Part A of GST EWB-03 within 24 hours and final report in Part B within three days).

2.2 The Court also noticed the prescribed Forms GST MOV-01 to MOV-11 detailing the procedural framework for interception, inspection, verification, detention, confiscation and release of goods and conveyances.

Interpretation and reasoning

2.3 It was found as an admitted factual position that: (i) e-way bill and tax invoice dated 29.07.2025 were generated, (ii) the vehicle was GPS enabled, (iii) the vehicle had reached and was stationed at the petitioner's factory premises on 29.07.2025, and (iv) four samples were taken before unloading.

2.4 Form GST MOV-02, dated 30.07.2025, recorded interception of the vehicle at 11:20 AM on 30.07.2025 and treated the goods as "in transit" with reasons regarding genuineness of goods and supplier. However, contemporaneous material and CCTV/photo evidence showed the vehicle was already stationed outside the factory since the previous day, and the officer himself was present inside the factory premises at the time mentioned in the MOV-02.

2.5 On these facts, the Court held that, once the vehicle had reached its destination and was stationed at the recipient's premises, it could not be treated as a conveyance carrying "goods in movement" within the scheme of Section 68 and the e-way bill regime. The assumption in MOV-02 that the goods were intercepted "in transit" was therefore factually incorrect.

2.6 The Court concluded that the procedure adopted in issuing MOV-02 and treating the vehicle as intercepted in transit was not in consonance with Section 68 and the Rules, and was driven primarily by information regarding the supplier's alleged tax evasion rather than by a genuine in-transit interception.

Conclusions

2.7 The Court held that the invocation of Section 68 and issuance of Form GST MOV-02, showing the vehicle as being intercepted "in transit" after it had already reached its destination, was not in accordance with law.

Issue 2: Effect of procedural irregularities in GST MOV forms and Rule 138C on legality of detention and entitlement to release/compensation

Legal framework (as discussed)

2.8 The Court set out Sections 129 and 130 of the Act of 2017 (detention, seizure and release of goods and conveyances in transit; confiscation and penalty) as well as Rules 139-141 of the Rules of 2017 (inspection, search, seizure, provisional release and disposal of seized goods).

2.9 The Court catalogued the roles of Forms GST MOV-01 to MOV-11, including MOV-02 (order of physical verification/inspection), MOV-03 (extension of time for inspection), MOV-04 (physical verification report), MOV-05 (release order), MOV-06 (order of detention under Section 129(1)), MOV-07 (notice under Section 129(3)) and MOV-10-11 (notice and order for confiscation under Section 130).

Interpretation and reasoning

2.10 The Court accepted that there were factual discrepancies and procedural irregularities: (i) the vehicle had reached destination but was still shown as intercepted in transit; (ii) Form MOV-03 was not issued for extension of time for physical verification beyond the prescribed period; and (iii) MOV-04 was issued on 31.07.2025 following earlier procedural lapses.

2.11 Nonetheless, the Court noted that MOV-04 had in fact been issued and that the respondents' case was not confined to mere document discrepancies in an otherwise bona fide movement of goods, but related to a larger investigation of bogus suppliers, sham transactions and fake ITC chains.

2.12 While acknowledging that provisions under Section 129 and related rules must be strictly followed for detention and seizure, the Court held that such procedural lapses could not be used to immunize a party who, prima facie, had abused the statutory framework to perpetrate large-scale tax evasion and to defeat the GST regime.

Conclusions

2.13 The procedural irregularities in issuance and sequencing of GST MOV forms, though noted and disapproved, were held insufficient to justify quashing of proceedings, mandatory release of goods/vehicle or grant of compensation in favour of the petitioner in the face of overwhelming material of alleged tax fraud.

Issue 3: Entitlement to writ relief and equitable remedies in light of allegations and material of bogus ITC and tax evasion

Legal framework (as discussed)

2.14 The Court referred to the overall GST framework-levy, collection, registration, input tax credit, inspection, search, seizure and arrest under various Chapters of the Act of 2017-to contextualize the alleged misuse of ITC and the seriousness of economic offences.

2.15 The Court expressly invoked equitable principles: the maxim "he who comes into equity must come with clean hands," emphasizing that discretionary relief under Article 226 is predicated on bona fide conduct and that courts must guard against abuse of process.

2.16 Reliance was placed on a recent Supreme Court judgment reiterating that parties seeking equity must not conceal material facts or pursue illegitimate gains; courts cannot support parties approaching with unclean hands.

Interpretation and reasoning

2.17 Based on the respondents' detailed reply and supporting records, the Court recorded prima facie findings that the petitioner had colluded with a cartel across multiple States, orchestrated sham transactions, and unlawfully availed ITC exceeding Rs. 100 crores on the strength of invoices from non-existent, de-registered or suspended entities.

2.18 The Court noted that: (i) alleged supplier firms had not procured genuine goods but had declared outward supplies to create artificial liability; (ii) fake credit was claimed through GSTR-3B taking advantage of the absence of automated cross-checks; (iii) the petitioner emerged as the ultimate beneficiary of the fake credit chain; and (iv) there were approximately 49 bogus suppliers allegedly involved.

2.19 With respect to the specific transaction, the driver's statement in MOV-01 indicated that the goods were loaded at Nangloi, Delhi, brought by multiple smaller vehicles, whereas documents showed supply from a Haryana-based firm, revealing material inconsistencies in the origin and movement of the goods.

2.20 The Court characterized the conduct as deliberate economic sabotage and gross abuse of statutory provisions, amounting to subversion of the GST framework by exploiting systemic gaps in electronic cross-verification.

2.21 Applying the clean hands doctrine, the Court held that a litigant who has fabricated and manipulated a chain of sham transactions and sought to weaponize the Court's equitable jurisdiction to neutralize enforcement actions is disentitled to discretionary relief under Article 226, notwithstanding certain procedural lapses by the authorities.

2.22 The Court emphasized that Article 226 powers are to protect law-abiding taxpayers and not to shield those who misuse statutory provisions; equity cannot be invoked to perfect or protect an unlawful scheme or colorable device designed to evade statutory prohibitions.

Conclusions

2.23 The Court declined all substantive writ reliefs, including quashing of MOV-02, release of goods and conveyance, stay of further proceedings, and any claim for compensation or costs against the authorities, on the ground that the petitioner approached the Court with unclean hands and was prima facie involved in a systematic tax fraud.

Issue 4: Justification for proceedings under Section 130 and imposition of exemplary costs

Legal framework (as discussed)

2.24 The Court examined Section 130 of the Act of 2017, which provides for confiscation of goods or conveyances and levy of penalty where, inter alia, any person supplies or receives goods or contravenes provisions of the Act/rules with intent to evade tax or uses conveyance in contravention of the Act.

2.25 The Court construed the term "contravenes" in Section 130(1)(iv) broadly to include not only direct violation of provisions but also attempts to abuse the process of law and to take advantage of procedural or systemic loopholes with the intent to evade tax.

Interpretation and reasoning

2.26 In view of the material showing that the petitioner had allegedly generated fictitious outward liability through bogus entities with empty credit ledgers, circulated fake credit through the supply chain, and exploited systemic gaps in the GST electronic system, the Court held that conditions for invocation of Section 130 were prima facie attracted.

2.27 The Court directed that confiscation proceedings under Section 130 should be pursued, and that other appropriate proceedings permissible under the Act of 2017 should also be initiated against the petitioner.

2.28 Considering the magnitude of alleged fraud, the abuse of judicial process, and the attempt to use the Court to nullify legitimate enforcement, the Court considered it appropriate to impose substantial costs as a deterrent and as a mark of disapproval of the petitioner's conduct.

Conclusions

2.29 The Court directed the authorities to proceed against the petitioner under Section 130 and other applicable provisions of the Act of 2017.

2.30 The writ petition was dismissed with costs of Rs. 5,00,000/- to be recovered from the petitioner-company through its Director, and all pending and stay applications were dismissed.

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