HC Upholds GST Show Cause Notice Alleging Fake ITC Chain; Quashes Order for No Hearing

The petitioner, engaged in trading crude tar, was issued a pre-show cause intimation in Form GST DRC-01A alleging wrongful availment of ITC. Despite submitting detailed replies with invoices, e-way bills, and financial records, the department proceeded with a show cause notice under Section 74 of the GST Act, alleging fraudulent ITC linked to cancelled suppliers.

Earlier proceedings had been remanded, after which fresh adjudication was initiated. The petitioner reiterated that transactions were genuine and supported by documents, arguing that ITC cannot be denied merely due to supplier defaults. However, during the pendency of the writ, the department passed an adjudication order confirming the demand without granting a personal hearing, prompting the present challenge.

Issue Before Court: Whether a show cause notice alleging fake ITC can be quashed at the threshold, and whether an adjudication order passed without personal hearing is valid.

HC Decided: The High Court upheld the validity of the show cause notice, observing that it was based on prima facie material and analysis of the ITC chain. It held that at the notice stage, only a “reason to believe” is required, not conclusive proof. The Court rejected allegations of premeditation, clarifying that recording prima facie findings does not indicate bias.

It further noted that mere production of invoices and e-way bills is not decisive where the genuineness of transactions is under doubt, and such issues must be examined during adjudication.

Thus, the Court set aside the adjudication order as it was passed without granting a personal hearing, violating statutory provisions and principles of natural justice. The matter was remanded with liberty to the petitioner to file a reply within 30 days, and the authority was directed to pass a fresh order after granting due hearing.

To Read Full Judgment, Download PDF Given Below