The Karnataka High Court has quashed a GST adjudication order after observing that there could have been an error in referring to invoices relating to stationery items when the proceedings themselves were initiated over alleged undeclared outward supplies of building materials to various Gram Panchayats under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme.
The bench of Justice B.M. Shyam Prasad has observed that the taxpayer should be given another opportunity to produce all relevant documents and raise additional grounds before the adjudicating authority.
The order was passed on July 7, 2026, in Writ Petition No. 19692 of 2026 filed before the Karnataka High Court at Bengaluru.
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The dispute arose from proceedings initiated by the Commercial Tax authorities against the petitioner for the tax period April 2020 to March 2021.
According to the adjudication order reproduced by the High Court, the authorities had verified information available on the MGNREGA website and noticed that the taxpayer had allegedly effected outward supplies of goods and materials such as sand and soil, boulders, cement, jelly, gravel, bricks, iron and steel, pipes and paint to various Gram Panchayats under the MGNREGA scheme.
On further verification of GST Prime and BOWEB, the authorities concluded that the taxpayer had not declared the corresponding turnover of material supplies in its GSTR-3B returns and had consequently failed to discharge the applicable tax liability.
The adjudicating authority treated this as a contravention of Section 39 read with Section 37 of the Karnataka Goods and Services Tax Act, 2017.
The proceedings culminated in an adjudication order dated February 25, 2025. The petitioner approached the High Court challenging that order and the consequential proceedings.
The petitioner argued that the proceedings had been initiated on the basis of verification of certain transactions appearing on a website maintained by a third-party entity and contended that such information could not constitute a proper basis for initiating proceedings against the taxpayer.
Apart from questioning the basis of the proceedings, the petitioner sought another opportunity to place material before the authorities to justify the declarations made in Form GSTR-3B.
The petitioner therefore sought interference with the adjudication order and an opportunity to substantiate its position through relevant records.
The State, however, defended the proceedings.
The Additional Government Advocate submitted that the proceedings were initiated because outward supplies made to different Gram Panchayats had allegedly not been declared in Form GSTR-3B.
It was further submitted that although the petitioner had not responded to the intimation issued in GST DRC-01A, the petitioner’s representative had filed a reply after issuance of the show-cause notice in GST DRC-01.
According to the State, the adjudicating officer was justified in rejecting the reply and documents because those records pertained to different outward supplies and not to the supplies forming the subject matter of the DRC-01A intimation and DRC-01 show-cause notice.
The crucial issue noticed by the High Court emerged from the contents of the adjudication order itself.
The adjudication order recorded that, in response to the show-cause notice, the taxpayer had stated that tax had already been paid on MGNREGA transactions. However, according to the authority, verification of the material submitted showed that the taxpayer was engaged in trading stationery items and had issued tax invoices for such items during 2020-21.
It further recorded that invoices pertaining to stationery items issued to various Panchayats did not amount to the material supplies under the MGNREGA scheme. On that basis, the taxpayer’s request was rejected and the show-cause notice was confirmed as an order under Section 73 of the CGST/KGST Act.
The petitioner informed the High Court that his definite instructions were that nobody on behalf of the petitioner had filed any response to the show-cause notice in GST DRC-01.
Examining the extracted portion of the adjudication order, the High Court found an apparent disconnect between the basis on which the proceedings had been initiated and the invoices referred to while adjudicating the matter.
The Court observed that the proceedings were initiated on the allegation that the outward supplies consisted of building materials, whereas the response referred to in the adjudication order was based on invoices relating to stationery items—which the petitioner itself disowned.
The High Court specifically observed that “there could be an error in referring to the invoices relating to stationery items.”
The Court was of the view that the petitioner should be provided another opportunity to produce all relevant documents and raise additional grounds in support of its case. At the same time, the Court clarified that such an opportunity would be granted subject to terms.
The Karnataka High Court allowed the writ petition and quashed the adjudication order dated February 25, 2025.
Instead of terminating the underlying GST proceedings altogether, however, the Court restored the matter to the adjudicating authority.
The proceedings arising from the intimation dated November 19, 2024 and the show-cause notice dated November 26, 2024 were restored to the first respondent for fresh consideration.
The Court permitted the petitioner to submit copies of the relevant documents in response to the November 26, 2024 show-cause notice along with a certified copy of the High Court’s order.
The petitioner was directed to produce the documents by August 20, 2026. The adjudicating authority was, in turn, directed to consider those documents and conclude the proceedings by passing a reasoned order.
The High Court’s order therefore does not finally determine whether the alleged supplies to Gram Panchayats were taxable, whether the turnover had actually escaped declaration in GSTR-3B, or whether tax was ultimately payable on those transactions.
Instead, the adjudication order was set aside because the Court noticed a possible error concerning the documents and invoices relied upon or referred to during adjudication and considered it appropriate to provide the taxpayer another opportunity to place the relevant material before the authority.
The GST authority will now have to reconsider the matter on the basis of the documents produced by the petitioner and conclude the proceedings through a reasoned order.
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