Section 74 of the CGST can be invoked only upon clear demonstration of fraud, wilful misstatement, or suppression of facts with intent to evade tax

The Hon’ble Allahabad High Court in the case of M/s Safecon Lifescience Private Limited Versus Additional Commissioner Grade 2 And Another - 2025 (9) TMI 919 - ALLAHABAD HIGH COURT held that proceedings under Section 74 of the UPGST Act cannot be sustained unless there is evidence of fraud, wilful misstatement, or suppression of fact to evade tax. The Court quashed orders passed merely on the basis of unverified intelligence reports and supplier registration cancellation, reiterating the necessity for mens rea and strict compliance with CBIC’s instruction dated December 13, 2023.

Facts:

Safecon Lifescience Private Limited ('the Petitioner') is engaged in manufacturing and trading pharma products and claimed ITC on purchases from Ms Unimax Pharma Chem, a then-registered supplier holding drug and GST licenses. The Petitioner furnished tax invoices, e-way bills, transporter documents, banking payments, and GST filings evidencing these transactions.

The Additional Commissioner Grade 2 and Deputy Commissioner, Commercial Tax, Agra ('the Respondent') issued a show cause notice under Section 74, citing an intelligence report about irregularities and the supplier’s cancelled registration. Orders denied ITC, alleging purchases were not genuine, invoice mismatches existed, and the supplier’s chain had tax defaults. The appeal authority upheld the decision based on similar grounds.

The Petitioner contended that all evidence for bona fide purchases and tax payment was on record and not rebutted. They stated Section 74 was wrongly invoked without any finding of fraud, wilful misstatement, or suppression of facts to evade tax, and the intelligence report was neither furnished nor verified.

The Respondent contended that ITC was ineligible due to the supplier’s tax compliance failure and the intelligence input substantiated invocation of Section 74. Aggrieved by adverse ITC orders, the Petitioner filed writ petition citing lack of findings and procedural unfairness.

Issue:

Whether Section 74 can be validly invoked and ITC denied based on unverified intelligence reports and supplier’s cancelled registration, without any specific finding of fraud, wilful misstatement or suppression of facts to evade tax?

Held:

The Hon’ble Allahabad High Court in M/s Safecon Lifescience Private Limited Versus Additional Commissioner Grade 2 And Another - 2025 (9) TMI 919 - ALLAHABAD HIGH COURT held as under:

• Observed that, Section 74 can only be invoked in cases involving fraud, wilful misstatement, or suppression with intent to evade tax, as reaffirmed by CBIC instruction dated December 13, 2023.
• Noted that, intelligence reports and supplier registration status, are insufficient for invoking the extended period and harsh actions under Section 74 without clear findings of misconduct or mens rea.
• Observed that, all records substantiating actual movement of goods, banking payments, GST returns and e-way bills were produced and not disproved or rebutted by the authorities.
• Quashed orders dated December 20, 2022 against the Petitioner and restored its ITC entitlement.

Our Comments:

This judgment strictly enforces statutory and circular criteria for invoking Section 74. The Allahabad High Court’s insistence on “mens rea” and detailed proof of evasion fortifies taxpayer protection from arbitrary actions rooted only in unverified intelligence or supplier compliance defects. The Court has relied on M/s Khurja Scrap Trading Company Versus Additional Commissioner Grade-2 (Appeal) & Another - 2025 (9) TMI 53 - ALLAHABAD HIGH COURT as the Supreme Court there held that “suppression” means failure to disclose with intent to evade and not mere omission.

Relevant Provisions:

Section 74(1), Central Goods and Services Tax Act, 2017:

“(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under Section 50 and a penalty equivalent to the tax specified in the notice…'

CBIC-20004/3/2023-GST dated December 13, 2023

“..

3.2 In this regard, section 74 (1) of CGST Act reads as follows:

'(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, '

3.3 From the perusal of wording of section 74(1) of CGST Act, it is evident that section 74(1) can be invoked only in cases where there is a fraud or wilful mis- statement or suppression of facts to evade tax on the part of the said taxpayer. Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful mis-statement or suppression of facts to evade tax. Therefore, only in the cases where the investigation indicates that there is material evidence of fraud or wilful misstatement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice…”

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