TaxTMI 
TaxTMI 
2026 (9) TMI 939
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....er in original dated 10.04.2026 (Annexure P-10), whereby a demand of Rs. 56,44,08,265/was raised against the petitioner. The third is quashing of the show cause notice dated 26.09.2025 (Annexure P-5), which was the precursor to that order. 2. The petitioner company manufactures pure lead and lead ingots. It procures raw material from Haryana, Delhi and Rajasthan, and also by way of imports. It asserts that in accordance with law it has maintained its books of account, discharged tax on outward supplies and availed input tax credit on the strength of purchases made from registered suppliers. 3. On 20.03.2024, the State Tax Authorities inspected the petitioner's premises. Queries were raised regarding purchases from certain suppliers whose registrations came to be cancelled thereafter. The petitioner produced ledgers, financial statements, stock details and creditor details. During the proceedings, the petitioner deposited Rs. 50,00,000/- through Form GST DRC-03. The deposit is stated to have been made under protest and without admission of liability. 4. Summons under Section 70 of the Act followed. The Director of the petitioner appeared and his statement was recorded on 22....
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....t the provision has been enacted with the legitimate object of protecting revenue and preventing evasion. Thus, it warrants no interference. 9. We have heard learned counsel for both sides and perused the record. 10. The petitioner assails the proceedings primarily on five planks. First, that Section 16(2)(c) is unconstitutional. Second, that the jurisdictional foundation for invoking Section 74 is absent, because the show cause notice contains no allegation of fraud, wilful misstatement or suppression of facts attributable to the petitioner. Third, that the prenotice intimation in Form GST DRC-01A was not issued. Fourth, that Respondent No. 3, having himself conducted the investigation, also sat as the adjudicating authority, which is hit by the Rule of bias. Fifth, it is also urged that the reply to the show cause notice was not dealt with in the order in original. 11. In the aforesaid backdrop, the following questions thus arise for adjudication:- (i) Whether Section 16(2)(c) of the Act is ultra vires the Constitution? (ii) If not, whether the provision is liable to be read down so as to protect a bona fide purchaser? (iii) Whether the show ca....
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....41. Availment of input tax credit.- (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited to his electronic credit ledger. (2) The credit of input tax availed by a registered person under subsection (1) in respect of such supplies of goods or services or both, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest, by the said person in such manner as may be prescribed: Provided that where the said supplier makes payment of the tax payable in respect of the aforesaid supplies, the said registered person may re-avail the amount of credit reversed by him in such manner as may be prescribed." 14. Section 155 of the Act places the evidentiary burden. It reads as follows. "155. Burden of proof.- Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person." 15. From a cumulative perusal of the above, four decisive features of the statutory sch....
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....been held that the burden of proving the genuineness of a transaction for the purpose of claiming input tax credit lies on the purchasing dealer, and that mere production of invoices, or payment by cheque, is not by itself sufficient. The dealer must establish the actual physical movement of goods and the genuineness of the transaction. 18. Pertinently, the constitutional validity of Section 16(2)(c) engaged the attention of different High Courts, which took divergent views. The High Court of Gujarat, in Maruti Enterprise v. Union of India, R/Special Civil Application No. 18080 of 2023 and connected matters, decided on 01.05.2026 (High Court of Gujarat), upheld the provision and declined to read it down. That judgment was carried to the Supreme Court and has been duly upheld by way of dismissed the SLP. 19. Hon'ble the Supreme Court, in Bhandari Scrap Traders v. Union of India [2026 SCC OnLine SC 1570], and connected matters, decided on 24.07.2026, dismissed the batch of petitions. The operative reasoning is as follows. "1. Though we are informed that a special leave petition has been entertained in relation to the decision of the Tripura High Court ... in Sahil Ente....
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....e and respectful agreement" with the High Court of Gujarat. In no uncertain terms it affirms and upholds the impugned judgment. The constitutional challenge to Section 16(2) (c), ibid, is thus water under the bridge and no more an issue which is res integra. 22. Question (i) is answered against the petitioner. Hence, the challenge to the vires of Section 16(2)(c) fails, and it is not open to be re-agitated. 23. When the instant order was being dictated, learned counsel for the petitioner also pressed the alternative plea of reading down. He relied on the judgment of the High Court of Tripura in Sahil Enterprises (supra), and the judgment of the High Court of Karnataka in Instakart Services Private Limited (supra). Reliance was also placed on the judgment of the High Court of Gauhati in National Plasto Moulding v. State of Assam [2024 (89) G.S.T.L. 82 Gauhati High Court] 24. The High Court of Tripura upheld the validity of Section 16(2)(c) but read it down, is the argument. It has been held that the provision ought to operate only where the transaction is found to be collusive or fraudulent, and not where it is bona fide. Its reasoning proceeded on the practical impossibili....
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....e full rigour of Section 16(2)(c) where the transaction is found to be collusive or fraudulent, or designed to defraud the revenue. Whether the petitioner's transactions fall on one side of that line or the other is a pure question of fact. 29. Moreover, it so appears that in Sahil Enterprises (supra), itself the finding of bona fides rested on a specific factual foundation. The department there had invoked only Section 73 of the Act. It had not invoked Section 74. It had not disputed that the purchaser had in fact paid the tax to the supplier. There was no allegation that the purchaser had failed to discharge its own liability. It was on those admitted facts that the transaction was held to be bona fide. 30. The present case is the converse. The department has invoked Section 74. The allegation is not of a supplier who collected tax and failed to remit it. The allegation is of fake invoices, bogus supplies and a chain of multi layered paper transactions in which no goods moved. That is precisely the class of case which the reading down, on its own terms, does not protect. Whether the allegation is made out is a matter for evidence and for the appropriate authority to conside....
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....tory words, unsupported by any material, would not do. But that is not the case here. Let us see how. 35. We have examined the show cause notice dated 26.09.2025 which led to the impugned order. It runs into thirty three pages. It sets out, in detail, how multi layered transactions were routed between bogus suppliers and the suppliers with whom the petitioner dealt. The chain of that layering is depicted in graphic detail. It is alleged in terms that credit was availed on the strength of fake invoices and bogus supplies, that is to say, on paper transactions unaccompanied by any movement of goods. Those allegations, if established, would squarely constitute fraud and suppression to evade tax within the meaning of Section 74. 36. We are conscious that a show cause notice which, on its face, lacks the jurisdictional ingredient can be quashed in writ jurisdiction. However, the practice of challenging show cause notices, with an intent to stall the statutory process, has to be deprecated. The proper course, ordinarily, is for the noticee to respond and to have the factual issues determined by the competent authority. 37. That is exactly what the petitioner ought to do in the c....
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....ion 74 requires him to issue notice and, thereafter, to determine the amount due. Parliament has therefore consciously placed investigation and determination within the competence of same statutory office. Thus, as per legislation, it is the assessing authority which gathers, both, i.e., the material and then also assesses upon it. 43. Where a statute itself confers both functions on the same authority, the Rule against bias, unless there is other material on record, stands displaced to that extent. In any case, such is the statutory scheme. 44. Further, the test for disqualification of an officer or Rule of bias is not one of mere apprehension. The test of existence of real likelihood of bias, or of a reasonable apprehension in the mind of a fair minded person. The petitioner has pleaded no personal interest on the part of Respondent No. 3. No animus. No material suggesting a closed mind. The only foundation is that the same officer performed both the functions. Which, as already observed by us, is envisaged under the statute. Such a foundation cannot, thus, be used as bias in the absence of anything cogent. 45. The final limb is that the reply to the show cause notice wa....