Mere Production Of E-Way Bills Not Proof Of Physical Movement Of Goods; GST Registration Can Be Cancelled For Fake ITC Claims: Madras High Court

"Constitution guarantees only genuine and honest trade and not illegal and fake trade intended to cheat the revenue of the State," Madras High Court, in a significant ruling, has held that the mere production of e-way bill printouts is insufficient to establish the actual physical movement of goods required to claim Input Tax Credit (ITC).

A Division Bench comprising Dr. Justice G. Jayachandran and Justice Shamim Ahmed observed that where an assessee fails to provide proof of freight charges, loading/unloading expenses, or lorry receipts, the cancellation of GST registration under Section 29(2)(a) of the CGST Act is justified to prevent further revenue loss.

The appellant, Tvl. Sri Balajee Udyog, a proprietorship firm, was registered under the GST regime in April 2022. Following an inspection by the Assistant Commissioner (ST), it was discovered that the firm’s premises were insufficient to support the massive volume of transactions involving an ITC claim of approximately Rs. 18.62 Crores. Consequently, the authorities cancelled the registration on grounds of suspected fabricated invoices and lack of evidence regarding the actual movement of goods, a decision subsequently upheld by the Appellate Authority and a Single Judge of the High Court.

The primary question before the court was whether the cancellation of GST registration was valid under Section 29(2)(a) of the CGST Act when the assessee failed to prove the physical movement of goods as per Section 16(2)(b). The court also considered whether the sharing of business premises with another entity could, by itself, constitute a ground for such cancellation.

Physical Movement of Goods Essential for ITC Claims

The court emphasized that for a transaction to be considered genuine under the GST framework, the physical movement of goods must be substantiated. It noted that the appellant had claimed an ITC of over Rs. 18.62 Crores but failed to provide any credible evidence of how such a large quantity of goods was transported. The bench observed that the appellant’s claim of transporting goods via "tricycles or motorcycles" was insufficient to justify the scale of the credit sought.

Mere E-Way Bills Not Conclusive Proof of Transport

The Division Bench clarified that the mere generation or production of e-way bills does not automatically translate to the actual physical delivery of goods. To satisfy the requirements of Section 16(2)(b) of the CGST Act, an assessee must produce supplementary documentation such as payment of freight charges, loading and unloading charges, lorry receipts, and way bills.

"Mere production of e-way bill is not a proof for real physical transportation of the goods."

Co-location of Premises and Statutory Compliance

Regarding the appellant's argument that sharing premises with M/s Gaurav Metal was not a legal impediment, the court noted that while co-location alone might not always justify cancellation, it becomes a relevant factor when the premises are clearly insufficient for the volume of trade claimed. The bench found that the lack of proof regarding the movement of goods remained the primary and substantive ground for the cancellation.

Action Against Fake Suppliers and Fraudulent Invoices

The court rejected the appellant's contention that no action was taken against the suppliers who allegedly issued the invoices. It noted that the State had initiated proceedings under Section 86A for blocking ITC and was contemplating action under Section 74 against all parties involved in the suspected "fake registration" ring. The court stated that when material indicates ITC is claimed on fabricated documents, cancellation is the most effective preventative measure.

"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."

Limits of Writ Jurisdiction in Factual Disputes

The Bench affirmed that the appellant was attempting to re-agitate questions of fact that had already been concurrently decided by two lower authorities. It held that the Writ Court cannot interfere with such findings unless they are perverse or lack jurisdiction. The court found that the proper officer had followed the due procedure under Section 29 of the GST Act and the relevant Rules before passing the cancellation order.

Power of State to Curb Fraudulent Trade

Concluding its reasoning, the High Court held that the constitutional protection under Article 19(1)(g) to practice any profession or carry on any trade or business does not extend to fraudulent activities. It reiterated that the State has the inherent power to cancel registrations to safeguard the revenue and ensure that only honest taxpayers benefit from the GST regime.

The Division Bench dismissed the Writ Appeal, affirming the Single Judge's order and the cancellation of the appellant's GST registration. The court concluded that the appellant failed to meet the statutory burden of proving the receipt of goods, thereby rendering the ITC claims illegitimate and the cancellation of registration valid under law.

Date of Decision: 20 April 2026