Facts of the Case:

In this case, the petitioner is engaged in the manufacture of pure lead and lead ingots and procures raw materials from Haryana, Delhi, Rajasthan as well as through imports. The petitioner claimed to have maintained its books of account, discharged GST on outward supplies and availed input tax credit on purchases from registered suppliers. On 20.03.2024, the State Tax Authorities inspected the petitioner’s premises and raised queries concerning purchases from certain suppliers whose registrations were subsequently cancelled. The petitioner produced ledgers, financial statements, stock and creditor details and, during the proceedings, deposited ₹50 lakh through Form GST DRC-03, stating that the payment was made under protest and without admission of liability.

Thereafter, summons under Section 70 were issued and the petitioner’s Director appeared on 22.04.2024. The petitioner furnished ITC ledgers, financial statements, bank statements, tax invoices, e-way bills, transportation documents, payment proofs, weighment slips and other records. According to the petitioner, the suppliers possessed valid GST registrations at the time of the relevant transactions and the purchases were supported by invoices, banking-channel payments and transportation documentation.

A show cause notice dated 26.09.2025 under Section 74 was subsequently issued for FY 2020-21 to FY 2023-24 alleging wrongful availment of ITC in respect of purchases from certain suppliers. The petitioner filed a detailed reply on 01.11.2025. However, the adjudicating authority passed the order-in-original dated 10.04.2026, confirming a demand of ₹56,44,08,265/-.

Issue:

Whether Section 16(2)(c) of the CGST Act is unconstitutional or should be read down to protect bona fide purchasers; whether the Section 74 SCN lacked the requisite allegation of fraud, wilful misstatement or suppression; whether non-issuance of DRC-01A and investigation and adjudication by the same officer violated natural justice; and whether the petitioner could bypass the statutory appeal under Section 107.

Held That:

The High Court upheld the constitutional validity of Section 16(2)(c), holding that ITC is a conditional statutory entitlement and actual payment of tax to the Government is a mandatory condition. The Court, relying upon the Supreme Court’s decision in Bhandari Scrap Traders v. Union of India, rejected the plea to read down Section 16(2)(c) merely to protect bona fide purchasers.

Since the Department had specifically alleged fake invoices, bogus supplies and paper transactions without movement of goods, the question whether the transactions were genuinely bona fide was held to be a fact-intensive issue requiring examination in statutory proceedings, not in writ jurisdiction.

The Court further held that Section 74 could not be said to have been invoked mechanically since the SCN contained detailed allegations capable, if established, of constituting fraud and suppression. DRC-01A was held to be discretionary, rather than a mandatory precondition, after the amendment to Rule 142(1A). The challenge based on the same officer conducting investigation and adjudication was also rejected, as the statutory scheme permits the proper officer to perform both functions. Since the petitioner had received the SCN, filed a detailed reply and was granted hearing, any grievance regarding appreciation of its defence was held to be a merits issue for appeal under Section 107.

Accordingly, the writ petition was disposed of and the petitioner was granted liberty to pursue the Section 107 appeal. The Court directed that the ₹50 lakh deposited through DRC-03 be given credit towards the statutory pre-deposit, while keeping all contentions on the merits, including the plea of bona fide transactions, open before the appellate authority.

Case Name: Sumetco Alloys Private Limited vs Union Of India dated 13.08.2026

Citation No. 2026 Taxo.online 2565