No Fraud, No Jurisdiction: Allahabad High Court Draws a Clear Line under Section 74

1. Introduction

Section 74 of the CGST/UPGST Acts is a penal provision intended to address cases involving fraud, wilful misstatement or suppression of facts with intent to evade tax. Over the past two years, the Allahabad High Court has consistently deprecated mechanical invocation of this provision. In M/s Raghuvansh Agro Farms Ltd. Versus State of U.P. and 2 others - 2025 (12) TMI 1236 - ALLAHABAD HIGH COURT the Court has once again reaffirmed that absence of the foundational ingredients of Section 74 renders the entire proceedings without jurisdiction. The judgment also settles important questions on cross-empowerment and evidentiary standards in alleged circular trading cases.

2. Brief Facts

The petitioner, M/s Raghuvansh Agro Farms Ltd., is engaged in the business of supply of agricultural goods and areca nuts. A survey was conducted at its premises on 22.01.2019. Based on the survey, a show cause notice dated 07.04.2021 in Form GST DRC-01 was issued under Section 74 alleging circular trading and wrongful availment of input tax credit.

The adjudicating authority passed an order dated 31.05.2023 confirming tax, interest and penalty. The first appellate authority dismissed the appeal on 10.01.2025. Aggrieved, the petitioner approached the Allahabad High Court.

The petitioner contended that:

1. all purchases and sales were supported by tax invoices, e-way bills, bilty and bank payments;
2. transactions were duly reflected in GSTR-1, GSTR-2A and GSTR-3B;
3. there was no allegation or finding of fraud, wilful misstatement or suppression; and
4. the petitioner was under Central GST jurisdiction and State GST authorities lacked jurisdiction in absence of cross-empowerment.

3. Issues Involved

1. Whether proceedings under Section 74 can be sustained without specific allegation and proof of fraud, wilful misstatement or suppression of facts.
2. Whether State GST authorities had jurisdiction to initiate proceedings against an assessee falling under Central GST jurisdiction without any cross-empowerment notification.
3. Whether ITC can be denied merely on allegation of circular trading despite documentary compliance.
4. Whether non-production of toll plaza receipts can justify adverse inference on movement of goods.

4. Statutory Framework

Section 74(1) of the CGST Act provides that where tax has not been paid, short paid or ITC has been wrongly availed by reason of fraud, wilful misstatement or suppression of facts to evade tax, the proper officer may issue notice.

Thus, existence of mens rea is a jurisdictional pre-condition for invoking Section 74. In absence thereof, the proper provision is Section 73.

The CBIC Circular dated 13.12.2023 also clarifies that Section 74 cannot be invoked merely due to non-payment of tax and requires material evidence of fraud or suppression.

5. Submissions of the Petitioner

The petitioner demonstrated that:

• All transactions were supported by tax invoices, e-way bills, bilty and bank payments.
• All supplies and purchases were duly reflected in GSTR-1,GSTR-2A and GSTR-3B.
• Proceedings against one of the suppliers (M/s Sibri Traders) had already been set aside by CGST authorities.
• There is no provision under the GST Act or Rules requiring production of toll plaza receipts.
• The petitioner fell under Central GST jurisdiction, and no notification of cross-empowerment existed authorising State officers to initiate proceedings.

6. Findings of the High Court

6.1 Absence of Fraud – Proceedings Without Jurisdiction

The Court categorically held:

“For initiation of proceedings under Section 74 of the Act, the authorities are duty bound to show the reason of fraud, wilful misstatement or suppression of fact… Once the aforesaid basic ingredient… is missing, the proceeding becomes without jurisdiction.”

The Court noted that neither the show cause notice nor the assessment order recorded any finding of fraud, wilful misstatement or suppression supported by evidence. Hence, the entire proceedings stood vitiated.

6.2 Lack of Cross-Empowerment – Jurisdictional Defect

The Court accepted the petitioner’s contention that it was under Central GST jurisdiction. It further observed that no cross-empowerment notification (except for refund under Section 54) was produced by the State.

In absence of such empowerment, initiation of proceedings by State GST authorities was held to be without jurisdiction.

6.3 Documentary Compliance Ignored by Department

The Court recorded that:

• All purchases and sales were reflected in GSTR-1,GSTR-2A and GSTR-3B..
• All payments were made through banking channels.
• E-way bills, tax invoices and bilty were produced.

The Court held that once statutory compliances were demonstrated, authorities were not justified in drawing adverse inference.

6.4 Toll Plaza Receipts – No Legal Requirement

The Court rejected the revenue’s reliance on non-production of toll receipts and observed:

“The revenue has failed to bring on record any provision or rule under the GST Act… which compel the assessee to file toll plaza receipts.”

The finding of the department was held to be patently perverse.

6.5 Supplier Proceedings Already Dropped

Proceedings against M/s Sibri Traders were already set aside by the Deputy Commissioner, Anti-Evasion, CGST, Gurugram. The Court held that once proceedings against the supplier were dropped, no adverse inference could be drawn against the petitioner.

6.6 Distinguishing Ecom Gill Coffee (SC)

The Court distinguished The State of Karnataka Versus M/s Ecom Gill Coffee Trading Private Limited - 2023 (3) TMI 533 - Supreme Court on facts, noting that in the present case actual movement of goods and return compliance stood established. Therefore, the reliance placed by the State was misplaced.

7. Placed Reliance on Consistent Allahabad High Court Jurisprudence

The Court relied upon and followed:

• HCL Infotech Ltd Versus Commissioner, Commercial Tax And Another - 2024 (9) TMI 1644 - ALLAHABAD HIGH COURT
• M/s Ajnara Realtech Limited Versus State Of Uttar Pradesh And 3 Others - 2025 (3) TMI 1029 - ALLAHABAD HIGH COURT
• M/s Vadilal Enterprises Limited Versus State Of U.P. And 2 Others - 2025 (6) TMI 1149 - ALLAHABAD HIGH COURT
• M/s Safecon Lifescience Private Limited Versus Additional Commissioner Grade 2 And Another - 2025 (9) TMI 919 - ALLAHABAD HIGH COURT
• M/s Khurja Scrap Trading Company Versus Additional Commissioner Grade-2 (Appeal) & Another - 2025 (9) TMI 53 - ALLAHABAD HIGH COURT

The Court also referred to M/s Continental Foundation Joint Venture Sholding, Nathpa HP Versus Commissioner of Central Excise, Chandigarh-I - 2007 (8) TMI 11 - Supreme Court, wherein the Supreme Court held that suppression must be wilful and with intent to evade.

8. Decision

The Allahabad High Court:

• Quashed the assessment order dated 31.05.2023 and appellate order dated 10.01.2025.
• Held that proceedings under Section 74 were without jurisdiction.
• Directed refund of any amount deposited by the petitioner in accordance with law.

9. Practical Significance

9.1 For Tax Administration

• Section 74 cannot be used as a general recovery tool.
• Fraud, wilful misstatement or suppression must be specifically alleged and proved.
• Jurisdiction must be clearly established, especially in Central–State interface cases.

9.2 For Taxpayers

• Proper maintenance of invoices, e-way bills, banking trail and GST returns remains the strongest defence.
• Jurisdictional objections are substantive and can invalidate proceedings at threshold.
• Allegations of circular trading must be backed by concrete evidence, not suspicion.

10. Conclusion

The judgment in M/s Raghuvansh Agro Farms Ltd. Versus State of U.P. and 2 others - 2025 (12) TMI 1236 - ALLAHABAD HIGH COURT is a significant reaffirmation of statutory discipline and rule of law in GST enforcement. It clearly demarcates the boundary between Sections 73 and 74, curbs jurisdictional overreach, and protects genuine taxpayers from arbitrary penal proceedings. The decision will have far-reaching impact in ongoing and future GST litigation involving Section 74.

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By: CA. Chitresh Gupta

Mobile: 99103 67918

https://www.linkedin.com/in/ca-chitresh-gupta-22795920