The Madhya Pradesh High Court has dismissed a writ petition challenging the blocking of input tax credit (ITC) of ₹23.78 lakh and a subsequent demand of ₹1.78 crore arising from allegedly bogus aluminium scrap transactions, observing that the dispute required examination of facts and that a statutory appeal was available.
The Bench of Chief Justice Alpesh Y. Kogje and Justice Vivek Jain also rejected the contention that earlier proceedings by Central GST authorities barred the State GST authorities from investigating a separate issue concerning fraudulent ITC, even though both proceedings concerned the same financial year.
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The Court expressly clarified that its observations were confined to deciding the writ petition and should not be treated as observations on the merits in the statutory proceedings available to the taxpayer.
The petitioner/assessee is a company engaged in manufacturing and trading aluminium extrusion and allied products.
The company initially challenged an order dated March 10, 2026, blocking its electronic credit ledger to the extent of ₹23,78,030 under Rule 86A of the GST Rules. It alleged that the authorities had acted without recording valid reasons to believe, considering its supporting documents, or providing an opportunity of hearing.
According to the company, it had complied with summons issued on December 27, 2025, and January 5, 2026, under Section 70 of the GST Act. It stated that it furnished GSTR-2A records, purchase and sale invoices, supplier ledgers, bank statements, e-way bills, TDS details and transportation records.
The company argued that these documents, together with suppliers’ admissions that aluminium scrap had actually been supplied, established genuine transactions and actual receipt of goods.
The company further submitted that Central GST authorities had already conducted search and inspection proceedings under Section 67 for financial year 2025-26. According to its submissions, the authorities physically verified stock and examined books of account, purchase records, stock registers and returns.
It stated that it paid the amount determined for discrepancies through Form GST DRC-03 and that those proceedings were concluded.
On that basis, the company invoked Section 6 of the GST legislation, arguing that the State GST authorities could not initiate parallel proceedings concerning the same subject matter and tax period.
It also maintained that the credit-blocking allegations were vague and lacked particulars of the invoices, suppliers, transactions and discrepancies relied upon. The restriction, it submitted, adversely affected its business operations and working capital.
The State opposed the petition, explaining that the earlier Central GST proceedings concerned alleged clandestine removal of goods, whereas the State proceedings concerned fraudulent availment and utilisation of ITC.
The State relied on an investigation by the Joint Commissioner, State Tax, Anti-Evasion Bureau, and a communication dated February 19, 2026, relating to alleged passing of bogus credit by M/s Unique Trade and Company.
According to the State, the supplier issued invoices showing outward supplies of aluminium scrap despite having neither genuinely purchased the scrap nor discharged the applicable reverse charge liability.
The respondents also argued that Rule 86A did not require a prior show-cause notice or a pre-decisional personal hearing. The Court recorded this submission, but did not separately formulate a detailed ruling on that procedural contention.
The order records that a communication in Form GST DRC-01A dated May 6, 2026, proposed tax, interest and penalty totalling ₹1,78,66,416. It concerned allegedly wrongful ITC of ₹81,95,604 from three suppliers: Unique Trade & Company, Madhushree Metal and Mahakal Metal.
During the pendency of the writ petition, the Joint Commissioner, State Tax, Jabalpur Division No. 1, passed an adjudication order holding the disputed ITC bogus and inadmissible. The company amended its petition to challenge that order as well.
The High Court records the adjudication order as dated September 28, 2026, in its discussion of the demand, although later paragraphs refer to September 26, 2026.
The demand comprised tax corresponding to the disputed ITC, interest and penalty, with the order referring to Section 74A(5)(ii), read with Sections 50 and 122 of the GST legislation.
The departmental findings reproduced and discussed by the High Court described the suppliers as non-genuine entities that had neither actually received nor supplied the goods covered by their invoices.
The investigation allegedly found that fictitious invoices relating to medicines, mobile phones, gold, garments and other goods were used to avail credit, which was then utilised to discharge tax on purported outward supplies of aluminium scrap and other goods.
The Court noted the departmental finding that no physical stock of the relevant goods was found at the business premises of the firms inspected on December 26, 2025. The investigation also relied on statements attributed to proprietors and the alleged absence of genuine inward purchases and payment of applicable tax.
According to the departmental assessment, the transactions formed part of circular trading designed to pass on bogus ITC without actual movement or supply of goods.
While examining the adjudication order, the Court noted the authority’s conclusion that tax invoices, e-way bills, banking transactions and supplier statements could not, by themselves, establish genuineness where actual receipt and supply of goods were absent.
The authority had rejected the company’s argument that only its suppliers’ ITC was bogus while the credit claimed by the company remained genuine. Its findings were that the company itself had availed and utilised credit without actual receipt of goods.
The statutory conditions discussed in the order were Section 16(2)(b), concerning actual receipt of goods, and Section 16(2)(c), concerning actual payment of tax to the Government. The departmental order treated those conditions as unfulfilled and also invoked Section 122(1)(vii).
These findings concerned allegedly fictitious transactions and absence of actual goods; the case was not addressed merely as one involving a supplier’s tax default in an otherwise established genuine purchase.
On the jurisdictional objection, the High Court held that Section 6 of the MPGST Act prohibits parallel proceedings only in respect of the same subject matter.
Since the State proceedings concerned a separate transaction and a fresh cause of action, the Court held that Section 6 was not attracted. The earlier conclusion of proceedings concerning clandestine removal did not, in these circumstances, prevent investigation of the distinct ITC allegations.
The Bench also observed that Rule 86A empowers the competent officer to block the electronic credit ledger where there are reasons to believe that ITC has been fraudulently availed or is otherwise ineligible. In this case, it noted that the belief was formed on the basis of the Anti-Evasion Bureau’s investigation report.
The Bench noted that an adjudication order under Section 74A had already been passed and that the taxpayer had an available statutory remedy of appeal.
The dispute would require examination of facts concerning allegations which, according to the department’s order, were supported by evidence. In those circumstances, the Court declined to exercise its jurisdiction under Article 226 of the Constitution and dismissed the writ petition.
Crucially, the Court expressly limited the effect of its observations to the writ proceedings. The dismissal therefore leaves the taxpayer to contest the factual findings and demand through the statutory process, without treating the High Court’s observations as a final determination of the merits in that process.
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