Wrong ITC Is Not Suppression - Section 74 Requires Evidence of Intent to Evade

Section 74 Cannot Be Invoked Merely Because the Taxpayer Is Wrong

An incorrect tax position is not necessarily a fraudulent one. A taxpayer may make an inadmissible claim or wrongly avail ITC, but such an error does not by itself establish fraud, wilful misstatement or suppression of facts with intent to evade tax. Section 74 requires something more than the existence of an incorrect claim-the Department must establish the culpable conduct contemplated by the provision.

This distinction has been examined by the GST Appellate Tribunal, Thiruvananthapuram Bench in M/s. Santhome Latex Enterprises Versus The Commissioner of CGST Thiruvananthapuram - 2026 (8) TMI 1363 - GSTAT THIRUVANANTHAPURAM. The decision is significant because it examines whether mere wrongful availment of ITC can constitute suppression and what must be disclosed in the Show Cause Notice before the more stringent provisions of Section 74 can be invoked.

The Dispute Arose from an Audit and Alleged Excess ITC

M/s Santhome Latex Enterprises was subjected to audit for the period July 2017 to March 2022, following which a Show Cause Notice was issued under Section 74(1) proposing recovery of allegedly excess ITC, along with interest and penalty. The notice alleged that the taxpayer had availed ineligible ITC without properly verifying its eligibility and treated such wrongful availment itself as suppression with intent to evade tax.

The Adjudicating Authority, however, found that the ITC had been availed on inward supply invoices and reconciled through Form GSTR-9C with the financial statements, with relevant documents also uploaded on the GST portal. In the absence of evidence of fraud, wilful misstatement or suppression, the proceedings under Section 74 were held unsustainable. Since the SCN did not provide for confirmation of the demand under Section 73, the proposed demand, together with consequential interest and penalty, was dropped.

Departmental Appeal Introduced a Different Basis for Suppression

The Department challenged the Order-in-Original before the Joint Commissioner (Appeals), contending that the taxpayer had failed to reply to the audit enquiry and final audit report and that such failure amounted to suppression under Explanation 2 to Section 74. The First Appellate Authority accepted this contention and reversed the Order-in-Original. However, this ground had not formed part of the original SCN, which had essentially treated the alleged wrongful availment of ITC itself as suppression.

The controversy before GSTAT therefore centred on whether wrongful availment of ITC, without evidence of culpable conduct, could constitute suppression; whether failure to respond during audit could amount to suppression when the relevant information was already disclosed through statutory filings; and whether Section 74 could be sustained at the appellate stage on a ground not contained in the original SCN.

Wrongful ITC and Suppression Are Not Interchangeable Concepts

The Tribunal found that the SCN contained no evidence to establish that the taxpayer knowingly availed inadmissible ITC. Mere failure to properly verify eligibility could not automatically amount to suppression. For invoking Section 74, the Department had to establish the additional element of fraud, wilful misstatement or suppression with intent to evade tax; every contravention of Sections 16(2) or 42(1) could not be treated as such merely because the credit was subsequently found inadmissible.

The distinction is important: ineligibility concerns the correctness of the claim, whereas suppression concerns the conduct accompanying it. An incorrect ITC claim may therefore justify consequences under the law, but it cannot by itself establish the culpable conduct required for Section 74. The Tribunal accordingly rejected the proposition that mere availment of ineligible or excess ITC amounted to suppression.

CBIC Itself Requires Evidence Before Section 74 Is Invoked

The Tribunal referred to CBIC Instruction No. 05/2023-GST dated 13.12.2023, which clarifies that Section 74(1) should be invoked only where there is material evidence of fraud, wilful misstatement or suppression of facts with intent to evade tax. Such evidence must form part of the Show Cause Notice; mere allegation of suppression or non-payment of tax is not sufficient.

The SCN in the present case, though issued after the Instruction, contained no material evidence establishing the requisite culpable conduct. The Tribunal therefore found that vague or bald assertions of fraud, wilful misstatement or suppression could not satisfy the statutory requirements for invoking Section 74.

Suppression Must Be Wilful

The Tribunal relied upon the Supreme Court decision in COSMIC DYE CHEMICAL Versus COLLECTOR OF CENTRAL EXCISE, BOMBAY - 1994 (9) TMI 86 - Supreme Court, which, while interpreting similar expressions under the Central Excise law, emphasised that misstatement or suppression must be wilful and accompanied by intent to evade duty. A mere incorrect statement or omission, without the necessary culpable element, cannot constitute suppression attracting the more stringent statutory consequences.

Applying this principle to GST, mere inadmissibility of an ITC claim cannot by itself establish suppression under Section 74. The Department must demonstrate through the notice and supporting material that the incorrect claim involved deliberate misstatement or concealment with intent to evade tax.

Mere Omission Is Not Suppression

The Tribunal also relied upon Commissioner of Central Excise, Nagpur Versus Ballarpur Industries Ltd. - 2007 (8) TMI 10 - Supreme Court, where the Supreme Court held that "suppression" must be construed strictly. Mere omission to furnish correct information does not constitute suppression unless it is wilful and intended to evade duty. Similarly, an incorrect statement does not become a wilful misstatement unless made with knowledge of its incorrectness.

This principle directly bears upon Section 74 of the CGST Act, which requires the tax shortfall or wrongful ITC to arise by reason of fraud, wilful misstatement or suppression of facts to evade tax. Where the relevant facts are already disclosed through GST returns, Form GSTR-9C or other statutory filings, mere detection of an ITC discrepancy from those disclosures cannot establish suppression. The Department must additionally show deliberate concealment or wilful non-disclosure with intent to evade tax; otherwise, the essential foundation for invoking Section 74 is absent.

Information Already on the GST Portal Cannot Easily Be Called Suppressed

The taxpayer had reconciled the ITC claimed in its returns with its financial statements through Form GSTR-9C and uploaded the relevant documents on the GST portal. The Adjudicating Authority therefore found no fraud, wilful misstatement or suppression. Where the very discrepancy relied upon by the Department emerges from statutory disclosures already available on the portal, an allegation that the same information was suppressed requires clear supporting evidence.

The Tribunal further found that the First Appellate Authority had neither considered nor displaced the finding that the relevant reconciliation was already disclosed through Form GSTR-9C/annual return filings. This omission materially weakened the allegation of suppression and contributed to the finding that the appellate order suffered from non-application of mind.

Audit Non-Response Is Not Suppression

The Department relied upon the taxpayer's failure to reply to the audit enquiry and final audit report, invoking Explanation 2 to Section 74, which included failure to furnish information when asked for in writing by the proper officer within the meaning of "suppression". The Tribunal, however, found that the relevant information and reconciliation were already available through statutory filings and that there was no statutory requirement to furnish a written reply to the final audit report.

Mere non-response during audit could therefore not, by itself, establish suppression attracting Section 74. Procedural non-response cannot be equated with culpable suppression unless the facts and evidence establish the statutory requirement of deliberate non-disclosure with intent to evade tax.

New Grounds Cannot Be Introduced in Appeal

The original SCN treated the alleged wrongful availment of ITC itself as suppression under Section 74. It did not allege that failure to reply to the audit enquiry or final audit report constituted suppression. That factual ground was introduced by the Department only while challenging the Order-in-Original, and was subsequently relied upon by the First Appellate Authority to reverse the adjudication order.

The objection was therefore not merely that a new argument had been raised in appeal, but that a new factual foundation for invoking Section 74 had been introduced after issuance of the SCN. Since the taxpayer had never been called upon in the notice to answer that allegation, the appellate authority could not use it to cure the deficiency in the Department's original case. The Tribunal accordingly found the Order-in-Appeal unsustainable on grounds of natural justice and non-application of mind.

The SCN Must Contain the Factual Foundation

Mere use of expressions such as "fraud", "wilful misstatement", "suppression" or "intent to evade" cannot justify invocation of Section 74. The SCN must disclose the foundational facts and material showing how the alleged tax default or wrongful ITC arose by reason of the culpable conduct contemplated by Section 74.

The wider principle emerging from the Tribunal's reasoning is that a tax contravention and the culpable conduct required for Section 74 are separate requirements. A wrong ITC claim or other statutory default may establish tax liability, but Section 74 requires something further-specific facts and evidence connecting that default with fraud, wilful misstatement or suppression with intent to evade tax. The statutory labels cannot substitute for that evidentiary foundation

Auhor's Note - Recent Supreme Court Rulings Reinforce the Tribunal's Approach

The Tribunal's reasoning finds strong support in two recent Supreme Court decisions. In M/s G.R. Infra Projects Limited Ratlam Versus The State of Madhya Pradesh & Ors. - 2026 (8) TMI 1497 - SC Order , it was emphasised that mere use of expressions such as fraud or suppression cannot justify Section 74; the foundational facts supporting such allegations must emerge from the SCN itself. In M/s. Tata Steel Limited Versus Union of India through the Secretary Ministry of Finance and Ors. - 2026 (8) TMI 1587 - Supreme Court, the Supreme Court further clarified that the officer's satisfaction must extend beyond the existence of a tax discrepancy to the culpable conduct required for invoking Section 74.

Read together with Santhome Latex Enterprises, these decisions reinforce an important principle: a tax discrepancy and culpable conduct under Section 74 are distinct requirements. Mere inadmissibility of ITC cannot, without specific facts and evidence of fraud, wilful misstatement or suppression with intent to evade tax, justify invocation of Section 74.

A Significant Ruling for Section 74 Litigation

The Tribunal found that the SCN failed to establish the ingredients necessary for invoking Section 74. Mere availment of ineligible ITC, or failure to respond during audit when the relevant information was already disclosed through statutory filings, could not by itself constitute suppression. The Order-in-Appeal was accordingly set aside and the appeals were allowed with consequential relief.

The significance of Santhome Latex Enterprises lies in the distinction it preserves between tax error and tax evasion. An incorrect ITC claim may attract consequences under GST, but Section 74 requires the Department to additionally establish, through specific facts and evidence, the culpable conduct contemplated by the provision. Mere non-compliance cannot be converted into suppression simply by attaching the statutory label to it.

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