2025 (9) TMI 53 - HC - GST

Order set aside and matter remanded: s.74 proceedings require proof of fraud, willful misstatement or suppression; verify GST records

M/s Khurja Scrap Trading Company Versus Additional Commissioner Grade-2 (Appeal) & Another

M/s Khurja Scrap Trading Company Versus Additional Commissioner Grade-2 (Appeal) & Another - 2025:AHC:151793 1. ISSUES PRESENTED AND CONSIDERED 1. Whether proceedings under section 74(1) of the CGST/State GST framework can be validly initiated and sanctions (interest/penalty/denial of input tax credit) imposed where the initiating material does not record or establish fraud, wilful mis-statement or suppression of facts to evade tax. 2. Whether input tax credit (ITC) can be denied to a purchaser where (a) the supplier was validly registered at the time of supply, (b) supplier filed GSTR-1 and GSTR-3B for the relevant period, and (c) the supplier's registration was cancelled only subsequent to the date of the transaction. 3. Whether an assessing/appeal authority may treat transactions as sham solely on the basis of a later physical inspection that the supplier was not found at the declared business premises, without independent material establishing fraud or suppression by the purchaser or supplier. 4. Whether administrative guidance (circular) requiring specific material of fraud/wilful mis-statement to be placed on record before invoking section 74(1) is binding on revenue authorities in the absence of contrary findings of fraud in the assessment records. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Invoking section 74(1): legal framework Legal framework: Section 74(1) permits issuance of show-cause notices where it appears to the proper officer that tax has not been paid or input tax credit has been wrongly availed by reason of 'fraud, or any wilful-misstatement or suppression of facts to evade tax'. Administrative circular guidance construes section 74(1) narrowly, requiring material evidence of fraud/wilful mis-statement/suppression to be part of the show-cause record. Precedent treatment: The Court relied on the reasoning of the Apex Court (as referred to in the record) and this Court's prior decisions which endorsed a restrictive application of section 74(1) where there is no material pointing to fraud or wilful suppression. Interpretation and reasoning: The Tribunal finds that section 74(1) cannot be invoked merely because tax remained unpaid or because a supplier was not later found at a premises. The circular's exposition - that invocation requires evidence of fraud/wilful mis-statement/suppression and such evidence ought to be part of the show-cause notice - is consistent with the statutory language and superior court dicta. The record here lacked any finding or material establishing fraud or wilful mis-statement by the purchaser or supplier. Ratio vs. Obiter: Ratio - section 74(1) requires evidence of fraud/wilful mis-statement/suppression to be recorded before invocation; administrative circular mandating such evidence is to be complied with by revenue authorities when initiating proceedings under section 74(1). Obiter - none material beyond this core conclusion. Conclusion: Invocation of section 74(1) in the absence of material evidencing fraud/wilful mis-statement/suppression renders the proceedings impermissible; the impugned assessment under that provision is legally unsustainable. Issue 2 - Entitlement to ITC where supplier was registered at time of supply and filed returns Legal framework: The CGST/State GST regime permits eligible recipients to claim ITC where input tax is reflected in supplier returns and statutory conditions are met at the time of supply; denial normally requires proof that supply was not genuine or that there was fraud on part of the claimant or supplier. Precedent treatment: The Court followed earlier decisions of this Court which held that when a supplier was duly registered at the time of the transaction and returns (GSTR-1/GSTR-3B) show the supplies, the purchaser's entitlement to ITC should not be negated merely because the supplier's registration was cancelled subsequently. Interpretation and reasoning: The record establishes that (a) the supplier was validly registered on the dates of the two transactions, (b) the supplier uploaded GSTR-1/GSTR-3B reflecting the supplies, and (c) the cancellation of registration occurred after the transactions. Given absence of any material challenging the genuineness of the transactions (payments through banking channel asserted; movement records from toll plaza corroborative), the revenue's approach of denying ITC without independent adverse material or findings of fraud is legally flawed. Ratio vs. Obiter: Ratio - where supplier was registered at the time of supply and returns reflect the transaction, subsequent cancellation of supplier registration does not, without additional adverse material, justify denial of ITC to the purchaser. Conclusion: The purchaser's claim to ITC could not be denied solely on the basis of subsequent cancellation of the supplier's registration and post-transaction inspection; reassessment must take account of supplier returns and available transaction evidence. Issue 3 - Effect of post-transaction physical inspection and non-presence of supplier at business premises Legal framework: Revenue may verify genuineness of transactions by physical inspection, but adverse inference from a later inspection must be supported by material linking the inspection result to fraud or mis-statement at the time of transaction. Precedent treatment: The Court relied on prior rulings of this Court which held that post-transaction inspection showing supplier absent at premises cannot, standing alone, convert valid transactions into sham supplies without corroborative evidence. Interpretation and reasoning: The authorities initiated proceedings on the basis that the supplier was not found at the business place during inspection and thereafter cancelled its registration. However, the transactions predated cancellation and supplier returns reflected the supplies. No specific material was placed on record to show that the purchaser colluded or that the supplies were fabricated; therefore, the later physical inspection does not suffice to treat the transactions as sham. Ratio vs. Obiter: Ratio - post-transaction non-presence of a supplier at declared premises, absent corroborative evidence of fraud, does not justify treating the earlier transactions as non-genuine or denying ITC. Conclusion: Revenue's reliance solely on post-transaction physical inspection to draw adverse inference was unjustified; the matters require fresh consideration with attention to contemporaneous returns and transactional records. Issue 4 - Binding effect of administrative circular and requirement of compliance by revenue authorities Legal framework: Administrative circulars interpreting statutory provisions and reflecting judicial pronouncements guide revenue practice and, where consistent with law, must be followed by assessing authorities. Precedent treatment: The circular in question implements the ratio of superior court authority (as referred in the record) by mandating that show-cause notices under section 74(1) include material evidencing fraud/wilful mis-statement/suppression. Interpretation and reasoning: Given the statutory text and judicial approach, the Court held that strict compliance with the circular is required; absent such compliance (i.e., absence of material of fraud in the show-cause/assessment record), invocations under section 74(1) are vitiated. Ratio vs. Obiter: Ratio - revenue must comply with the circular's prescription and place material of fraud/wilful mis-statement/suppression on record before invoking section 74(1); failure to do so invalidates the proceedings taken under that provision. Conclusion: Administrative guidance requiring the inclusion of material evidencing fraud in proceedings under section 74(1) is to be followed by revenue authorities; non-compliance is fatal to the resultant assessment/penalty/denial actions. Remedial outcome applied Because the record lacked any finding or material establishing fraud/wilful mis-statement/suppression, and because the supplier was registered and had uploaded returns for the relevant period, the impugned orders under section 74(1) could not be sustained. The orders were quashed and the matter remanded for de novo decision after affording opportunity of hearing and verifying the contemporaneous records on the GST portal and other transaction evidence.