2025 (9) TMI 919 - HC - GST

Section 74 UPGST proceedings quashed where petitioner proved goods movement and tax paid; no fraud or wilful suppression

M/s Safecon Lifescience Private Limited Versus Additional Commissioner Grade 2 And Another

HC held that proceedings under section 74 UPGST against the petitioner were unjustified and quashed the impugned assessment and appellate orders. The ... Issuance of SCN u/s 74 of the UPGST Act on the ground that the petitioner has claimed ITC through GSTR-3B for the tax period April, 2021 - claim of forged ITC - purchases from different firms who did not deposit the tax - wilful suppression of facts or not - HED THAT:- Once actual movement of goods as well as payment of tax by the respondent authorities have been proved by the petitioner to which no rebuttal has been brought on record at any stage, proceedings under section 74 of the Act cannot be justified - Record shows that neither any finding with regard to fraud has been noticed nor mis-statement nor suppression of fact has been recorded at any stage. Section 11-A of the of the Central Excise Act, 1944 is having analogous provision to Section 74 of the UPGST Act. The Apex Court in the case of Continental Foundation Joint Venture Holding, Nathpa, H.P. vs. Commissioner of Central Excise, Chandigarh-I [2007 (8) TMI 11 - SUPREME COURT] had an occasion to consider the expression 'suppression', 'wilful misstatement' and has held that incorrect statement, unless made with the knowledge that it was not correct, would will not be a ground of wilful misstatement or suppression and no inference can be drawn if full information has been disclosed without intent to evade payment of tax. In the case in hand the authorities have neither recorded any findings of fraud nor wilful misstatement nor suppression of fact to evade payment of tax, therefore, the proceedings under section 74 of the Act out not to have been initiated against the petitioner. The impugned order dated 20.12.2022 passed by the Additional Commissioner, Grade-2 (Appeal)- II State Tax, Agra, respondent no.1 as well as the order dated 12.1.2022 passed by the Deputy Commissioner, Commercial Tax, Agra, respondent no.2 cannot be sustained and are hereby quashed - Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED Whether proceedings and show cause notice under Section 74 of the UPGST/CGST framework can be validly initiated against a recipient who claimed input tax credit (ITC) where (a) the recipient produced evidence of actual receipt/movement of goods, payment through banking channels and filing of GSTR-3B reflecting tax payment, and (b) the supplier's GST registration was subsequently cancelled or supplier's antecedent transactions were questioned by a tax intelligence unit. Whether invocation of Section 74 requires specific findings of fraud, wilful mis-statement or suppression of facts with intent to evade tax before initiating criminal/extended scrutiny proceedings, and if failure to verify intelligence reports or to record such findings renders the proceedings unsustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue A: Validity of initiating proceedings under Section 74 where recipient produces documentation of genuine supply, movement of goods, banking payments and filed returns Legal framework: Section 74 (analogous to Section 74 of CGST Act and compared to Section 11A of Central Excise Act) permits invocation only where tax has not been paid 'by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax.' Section 16(2)(c) (noted by authorities) concerns claim of ITC subject to supplier's deposit of tax as per returns. Precedent treatment: The Court relied on a contemporaneous administrative circular (13.12.2023) interpreting Section 74 to require fraud/wilful mis-statement/suppression as precondition for initiating such proceedings; earlier High Court rulings applying the circular and the Apex Court authority on analogous provisions (Continental Foundation line) were followed. Prior decisions holding that where the supplier was registered and had uploaded returns, adverse action against recipient was improper were cited and applied. Interpretation and reasoning: The Court examined the record and found the petitioner produced purchase invoices, e-way bills, transport bilty, banking evidence of payment, and GSTR-3B entries for both purchaser and supplier; these materials demonstrated actual movement of goods and tax payment. The authorities initiated proceedings on an intelligence report alleging irregularity in supplier's antecedent purchases, but failed to verify the intelligence, failed to produce or make part of the record the material underlying the intelligence, and recorded no finding of fraud, wilful mis-statement or suppression against the supplier in relation to the sales to the petitioner. The Court held that where the recipient establishes genuine supply and tax payment and no cogent rebuttal or findings of fraud exist, invoking Section 74 is not justified. Ratio vs. Obiter: Ratio - Proceedings under Section 74 cannot be sustained where recipient proves genuine supply, tax payment and filing of returns and no finding of fraud/wilful mis-statement/suppression is recorded; an intelligence report must be verified and its material disclosed before using it to initiate Section 74 proceedings. Obiter - observations on the policy aim of GST ('ease of business') and revenue officers acting contrary to that aim. Conclusion: The initiation and continuance of proceedings under Section 74 were unsustainable on the record and the orders based thereon could not stand. Issue B: Requirement of specific findings of fraud, wilful mis-statement or suppression (mens rea) before invoking Section 74; standard of proof and burden on revenue Legal framework: Textual reading of Section 74 (and analogous Section 11A of Central Excise Act) shows that words like 'fraud', 'wilful mis-statement' and 'suppression' import mens rea; suppression requires deliberate omission to evade tax; mis-statement must be wilful. Administrative circular 13.12.2023 reiterates that Section 74 is invocable only where investigation indicates material evidence of fraud/wilful mis-statement/suppression and such evidence should form part of the show cause notice. Precedent treatment: The Court followed the Apex Court's interpretation of analogous provisions that mere incorrect statements are not equivalent to wilful mis-statement and that the revenue bears the burden to prove suppression; earlier High Court pronouncements applying these principles and requiring strict compliance with the circular were followed. Interpretation and reasoning: The Court applied the mens rea requirement strictly: absent a recorded finding of fraud, wilful mis-statement, or suppression with intent to evade tax, extended/criminal-type proceedings under Section 74 are inappropriate. The record lacked any such findings; the intelligence report relied upon was not verified and its underlying material was not disclosed to the taxpayer; therefore the threshold to trigger Section 74 was not met. The Court emphasized that when facts at the time of transaction show the supplier was registered and returns/tax deposits were uploaded, adverse action against recipient is not warranted unless further material establishes mens rea. Ratio vs. Obiter: Ratio - Section 74 requires evidence of fraud/wilful mis-statement/suppression (mens rea) before issuance of notices; the revenue must verify intelligence and include material evidence in the show cause notice. Obiter - references comparing policy aims of GST and administrative tendencies of revenue officers. Conclusion: The absence of any recorded finding or supporting material showing fraud, wilful mis-statement or suppression meant the proceedings under Section 74 were legally improper and liable to be quashed. Issue C: Legitimacy of relying solely on intelligence reports from a central intelligence unit without verification or disclosure to the affected registered person Legal framework: Administrative fairness and natural justice require that material relied upon to initiate punitive or extended proceedings be verified and disclosed to the affected party, particularly where invocation of Section 74 carries severe consequences. Precedent treatment: The Court followed prior decisions and the administrative circular emphasizing that intelligence must be verified and evidence made part of proceedings; CEGAT/Apex Court jurisprudence on burden and proof under analogous provisions was applied. Interpretation and reasoning: The impugned orders were based predominantly on an intelligence communication from a central intelligence unit; the authorities failed to verify the information before acting and did not provide the underlying report or material to the recipient. The Court held that reliance on unverified intelligence without affording the taxpayer an opportunity to meet the material is impermissible. Use of such information 'with closed eyes' cannot justify initiation of Section 74 proceedings. Ratio vs. Obiter: Ratio - Intelligence reports must be verified and their material disclosed/placed on record before being used as a basis for Section 74 actions. Obiter - emphasis that failure to verify is particularly egregious where the supplier had filed returns showing tax payment. Conclusion: The appellate authority erred in treating the intelligence communication as conclusive without verification or disclosure; hence the orders made on that basis were unsustainable. Final Conclusion Because the record established actual movement of goods, payment through banking channels, and filed GSTR-3B entries for both parties, and because no findings of fraud, wilful mis-statement or suppression were recorded and the intelligence report relied on was neither verified nor disclosed, the initiation of proceedings under Section 74 and the resulting orders were quashed.