Section 74 proceedings without specific fraud/ suppression allegation liable to be quashed

The Hon’ble Allahabad High Court in the case of M/s Raghuvansh Agro Farms Ltd. Versus State of U.P. and 2 others - 2025 (12) TMI 1236 - ALLAHABAD HIGH COURT held that proceedings and orders under Section 74 of the UPGST Act are without jurisdiction where the show cause notice and assessment order do not allege or record any categorical finding, supported by evidence, of fraud, wilful misstatement or suppression of fact to evade tax, and that drawing adverse inference for non-production of toll plaza receipts to prove physical movement of goods is unjustified in absence of any statutory requirement, particularly when tax invoices, e-way bills, banking-channel payments and transporter ledgers are on record and un-disputed, and accordingly quashed the orders.

Facts:

M/s Raghuvansh Agro Farms Ltd. (“the Petitioner”) is a private limited company engaged in the business of supply of agricultural goods and areca nuts, maintaining books of account and paying due taxes, against whom a survey was conducted on January 22, 2019. Pursuant to this, the State of U.P. and 2 others, including the Deputy Commissioner, State Tax, Sector 10, NOIDA (“the Respondents”) initiated proceedings under Section 74 of the UPGST Act on the basis of survey alleging circular trading and wrongful availment of ITC without actual movement of goods, issued DRC-01 dated April 7, 2021.

The Petitioner submitted reply to it on May 7, 2021, and on the basis of said reply another notice dated May 13, 2022 to which the Petitioner filed detailed reply with relevant documents on June 17, 2021, but without providing any opportunity of personal hearing, order dated May 31, 2023 was passed, and appeal against the said order was dismissed by order dated January 10, 2025.

The Respondent contended that the Petitioner was engaged in circular trading claiming ITC without actual movement of goods, failed to produce toll plaza receipts to justify physical movement, failed to bring cogent material for physical movement in some cases, thus orders are justified.

Aggrieved by the order dated May 31, 2023 without personal hearing and appellate order dated January 10, 2025 affirming Section 74 demand/penalty based on alleged circular trading and non-production of toll receipts despite complete documentary compliance and lack of jurisdiction/fraud findings, the Petitioner approached this Court.

Issue:

Whether the initiation and continuation of proceedings under Section 74 of the UPGST Act, 2017 on allegations of circular trading and wrongful ITC availment without any specific allegation or categorical finding of fraud, wilful misstatement or suppression of facts to evade tax in the show cause notice or orders, and drawing adverse inference merely on nonproduction of toll plaza receipts despite complete documentary trail of invoices, e-way bills, bilty, banking payments and returns, and in the absence of jurisdictional basis for State GST authorities in the absence of cross-empowerment, are sustainable in law?

Held:

The Hon’ble Allahabad High Court in M/s Raghuvansh Agro Farms Ltd. Versus State of U.P. and 2 others - 2025 (12) TMI 1236 - ALLAHABAD HIGH COURT held as under:

• Observed that, the proceedings were initiated under Section 74 of the SGST Act based on survey; for initiation under Section 74, authorities are duty bound to show reasons of fraud, wilful misstatement, suppression of fact for wrongful availment of ITC or excessive ITC claim; adjudicating authority must expressly state in SCN that assessee wrongly availed/used ITC due to fraud, wilful misstatement or suppression; if such basic ingredient is missing in SCN under Section 74, proceedings become without jurisdiction as assessing authority derives jurisdiction to proceed u/s 74 only when basic ingredients are present.
• Noted that, in present case, adjudicating authority neither in SCN nor in assessment order recorded any such finding supported by due evidence, and in absence of specific categorical finding supported by evidence, entire proceeding against Petitioner is vitiated.
• Observed that, specific pleadings were raised that State GST authorities have no jurisdiction in absence of any cross empowerment notification, as Petitioner falls under CGST Commissioner, Division III, Range XVI. Neither impugned orders nor counter affidavit brought any material to justify State GST jurisdiction.
• Noted that, all purchases and sales made by Petitioner are duly reflected in books and in GSTR-1, 2A, 3B and all transactions through banking channels and recorderd. Further all transactions also declared on GST portal. Thus noted that, on mere survey, all evidence has been brushed aside.
• Observed that, no adverse inference can be drawn against Petitioner; allegation of circular trading is without material.
• Held that, inference drawn against Petitioner for failure to submit toll plaza receipts to justify physical movement is patently perverse and without basis as the Revenue failed to show any GST Act/Rules provision compelling assessee to file toll plaza receipts; on contrary, e-way bills, bilty, tax invoices and transporter payments via banking channel along with transporter ledger were on record and no defect pointed out. Thus impugned order cannot be justified.
• Noted the judgment of the Supreme Court in M/s Continental Foundation Joint Venture Sholding, Nathpa HP Versus Commissioner of Central Excise, Chandigarh-I - 2007 (8) TMI 11 - Supreme Court interpreted “suppression”, “wilful misstatement” in Section 11ACentral Excise Act as requiring mens rea. Suppression means failure to disclose full information with intent to evade duty. Mere incorrect statement without knowledge not wilful misstatement and when Revenue invokes extended period burden to prove suppression with intent is on Revenue. This interpretation applies analogously to Section 74UPGST.
• Held that, in present case, authorities at no stage recorded findings of fraud, wilful misstatement or suppression to evade tax. Therefore, proceedings under Section 74 ought not to have been initiated against Petitioner; impugned orders dated January 10, 2025 and May 31, 2023 cannot be sustained and are quashed.

Our Comments:

This 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, which interprets based on the settled principles that, as far as fraud and collusion are concerned, it is evident that the intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word 'wilful', preceding the words 'mis-statement or suppression of facts' which means with intent to evade duty. The next set of words 'contravention of any of the provisions of this Act or Rules' are again qualified by the immediately following words 'with intent to evade payment of duty.' Mis statement of fact must be wilful.”

Relevant Provisions:

Section 74(1) of the CGST/UPGST Act, 2017:

“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, 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 utilized input tax credit, requiring him to show cause 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.”

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