Misuse of GST Registration and Evasion Through Misclassification:
The Curious Case of Gurunanak Arecanut Traders
Introduction
In an era where Goods and
Services Tax (GST) compliance plays a pivotal role in the transparency of trade
and business practices, the judiciary has been active in curbing malpractices.
One such case is M/s Gurunanak Arecanut Traders vs. Commercial Tax Officer
& Another, a decision delivered by the Allahabad High Court in March
2025. The ruling reinforces the principles of strict compliance with GST
procedures, particularly the mandatory use of e-way bills and accurate
classification of goods.
Case Details at a Glance
- Case Name:
M/s Gurunanak Arecanut Traders vs. Commercial Tax Officer and Another
- Case Number:
Writ Tax No. 1177 of 2022
- Date of Judgment:
05 March 2025
- Bench:
Hon'ble Justice Rohit Ranjan Agarwal
- Court:
High Court of Judicature at Allahabad
- Petitioner’s Advocate:
Ms. Pooja Talwar
- Respondent’s Advocate:
Sri Arvind Kumar Mishra (State Standing Counsel)
Factual Matrix
The petitioner, Gurunanak
Arecanut Traders, based in Delhi, claimed to be a registered GST dealer. On
09 June 2022, the petitioner sold 400 bags of Arecanut to a Maharashtra-based
dealer, M/s Jagdamba Enterprises. The goods were dispatched via M/s
Ravi Goods Transport.
On 10 June 2022, at
around 4:28 a.m., the transport vehicle was intercepted by tax authorities in
Mathura, Uttar Pradesh. During inspection, it was discovered that the
consignment was not accompanied by an e-way bill, which is a mandatory
requirement under GST laws for the transportation of goods.
Subsequently, the e-way
bill was generated only after the interception at 7:36 a.m. the same
day. The goods were detained, and an order under Section 129(1) of the SGST Act
was passed on 16 June 2022. The penalty order under Section 129(3) followed on
24 June 2022, with a total demand of Rs. 90,62,400/-.
Petitioner’s Contentions
Advocate Ms. Pooja
Talwar, on behalf of the petitioner, presented several arguments:
1. Denial of Natural
Justice
She argued that the
orders were passed without providing a reasonable opportunity for the
petitioner to respond, which violated the principles of natural justice.
2. Clerical Mistake, Not
Evasion
The absence of an e-way
bill at the time of interception was claimed to be unintentional. The driver,
acting independently and without notifying the petitioner, had left with the
goods. Upon learning of the lapse, the petitioner promptly generated the e-way
bill.
3. Misclassification is
Not a Ground for Detention
The tax authorities
alleged that the goods were processed betel nut (Chikni Bhuni Supari),
taxable at 18%, whereas the petitioner had declared them as Arecanut,
taxable at 5%. The petitioner contended that disputes over classification do
not justify seizure or detention under Section 129.
4. Reliance on Previous
Judgments
The petitioner cited
multiple decisions, such as:
- Modern Traders v. State of U.P.
- Axpress Logistics v. Union of India
- Raj Iron v. Union of India
- Asharaf Ali v. Assistant State Tax
Officer (Kerala HC)
These were invoked to
support the principle that procedural lapses, without mala fide intent, should
not attract heavy penalties.
Respondent’s Submissions
Representing the State,
the Standing Counsel, Sri Arvind Kumar Mishra, responded with a factual and
procedural rebuttal:
1. Clear Attempt to Evade
Tax
The e-way bill was
downloaded after the vehicle had already been caught. This wasn’t a
minor error but a deliberate circumvention of compliance rules. The delay of
approximately three hours indicated malafide intent.
2. Ghost Business
Premises
The address registered
under GST for Gurunanak Arecanut Traders was found to be non-functional.
An inquiry report dated 14 June 2022 concluded that no business activity
occurred at the claimed site. Hence, the registration itself was flagged for suo
motu cancellation.
3. Discrepancy in
Documentation
There were
inconsistencies in the signatures of the firm’s proprietor across various
documents. Additionally, the dispatch location mentioned in the e-way bill
(North-West Delhi, PIN 110041) did not match the actual loading point (Bakauli,
PIN 110036).
4. Deliberate
Misclassification
The goods were physically
verified to be processed and roasted betel nut, a product taxable at
18%, not raw Arecanut (5%). Thus, a conscious effort was made to evade tax by
underreporting the applicable rate.
5. Notice Was Served
Contrary to the
petitioner’s claim, the authorities had served the show cause notice to the
driver and also sent it via email to both the buyer and seller on 16 June 2022.
No reply was received from either party.
Key Legal Questions
Addressed
1. Is
e-way bill compliance mandatory at the time of transit?
2. Can
post-interception rectification cure the original violation?
3. Does
misclassification justify detention and penalty under Section 129?
4. Were
principles of natural justice followed?
Court’s Analysis and
Observations
Justice Rohit Ranjan
Agarwal offered a robust and well-reasoned judgment, addressing each contention
in detail.
A. Mandatory Nature of
E-Way Bill Post-2018
The Court reiterated that
after the 14th Amendment to the UP GST Rules (effective 01 April 2018),
carrying an e-way bill during transit became obligatory. Absence of the
same triggers a legal presumption of tax evasion.
“The presumption of
evasion of tax becomes rebuttable only by production of cogent materials, which
is absent in this case.”
B. Post-Interception
Compliance is Invalid
Referring to the
judgments in Akhilesh Traders and Jhansi Enterprises, the Court
affirmed that generating documents after being caught does not neutralize
the offence.
C. Failure to Respond to
Show Cause Notice
The petitioner’s claim of
not receiving notice was contradicted by records. The driver was handed the
notice, and it was also sent electronically. Non-response showed a lack of
seriousness and weakened their case.
D. Classification and
Intent
The physical verification
revealed that the goods were Chikni Bhuni Supari, not raw Arecanut. The
description in the invoice deliberately invoked a lower tax bracket. This
manipulation further proved intent to evade.
E. Legality of Detention
and Penalty
The Court held that
authorities rightly invoked Section 129 of the GST Act. Since the entire
transaction appeared dubious, and the registration of the firm itself was under
scrutiny, the penalty and detention were justified.
Conclusion of the Court
In unequivocal terms, the
Court concluded:
“The petitioner has not
complied with the provisions of law... Conduct clearly reveals an intention to
evade tax.”
Thus, the writ petition
was dismissed.
Conclusion: Compliance Is
Non-Negotiable
This case serves as a
stern warning to businesses across India. GST compliance is not just
procedural—it’s substantive. The attempt to pass off higher-taxed goods as
lower-taxed items, coupled with transportation without an e-way bill, left the
petitioner without any credible defense.
The judgment also
clarifies that once goods are intercepted and violations are found, post-facto
compliance cannot sanitize the infraction. Furthermore, a business that
exists only on paper, and fails to maintain authentic records, risks losing not
just its case but its GST registration altogether.
Key Takeaways for GST
Stakeholders
- Always generate e-way bills before
commencing movement of goods.
- Ensure accuracy in HSN
classification and tax rates.
- Keep registered business premises
operational and regularly updated on the GST portal.
- Document inconsistencies or forged
paperwork can be fatal.
- Legal representation should be
proactive, especially after receiving notices.
Disclaimer: All
the Information is based on the notification, circular and order issued by the
Govt. authority and judgement delivered by the court or the authority
information is strictly for educational purposes and on the basis of our
best understanding of laws & not binding on anyone.
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