2025 (11) TMI 1183 - HC - GST

Quashed s.74(1) proceedings where dealer's registration restored, documents showed goods movement, bank payments, no fraud or suppression

M/s BP Oil Mills Ltd. Versus Additional Commissioner Grade-2 And Another

HC quashed proceedings initiated under s.74(1) of the Act against the taxpayer. Court found that the selling dealer's registration had been restored, ... Initiation of proceedings under section 74(1) of the Act - bogus purchase - selling dealer of the Rajasthan is non existing dealer - availment of benefit of ITC - HELD THAT:- Once the registration of the selling dealer has been restored it cannot be said that all transactions made from an unregistered dealer. Record further shows that the petitioner has brought on record the documentary evidence along with the reply to the notice under section 74 of the Act about the actual physical movement of the goods. Further record shows that all payments were made through banking channel, moreover, accounts book, ledger book having entries of the same were produced in which no discrepancy was pointed out by any of the authorities. Further the circular dated 13.12.2023 has been issued for initiation of proceedings under section 74(1) of the Act only if there is a fraud or mis-statement or suppression of fact with a view to evade payment of tax - Record further shows that the registration of the selling dealer was restored. Once the registration of the selling dealer has been restored no adverse view could have been drawn against the petitioner. Further record shows that the actual physical movement of the goods was established by bringing on record various documentary evidence but the same has been brushed aside by the authorities very lightly. In absence of any adverse material on record, this Court feels that the proceedings initiated against the petitioner cannot be sustained in the eyes of law. The impugned orders in all the writ petitions cannot be sustained and are hereby quashed - Petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether proceedings under section 74 of the Act (relating to recovery for fraud, wilful misstatement or suppression of facts) can be validly initiated where the supplier's registration, alleged to be cancelled at the time of investigation, was subsequently restored and the buyer produced contemporaneous documents showing physical movement of goods and payment through banking channels. 2. Whether the Government circular dated 13.12.2023 (which sets out conditions for initiation of proceedings under section 74(1)) is binding on subordinate officers and limits invocation of section 74 to cases where there is material evidence of fraud, wilful misstatement or suppression of facts to evade tax. 3. Whether, in the absence of any adverse material establishing fraud, wilful misstatement or suppression by the taxpayer, orders passed invoking section 74 and levying demand/penalty can be sustained. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of section 74 proceedings where supplier's registration was restored and transactional records show physical movement and banking payments Legal framework: Section 74 of the Act permits action where it appears to the proper officer that tax has not been paid or input tax credit wrongly availed by reason of fraud, wilful misstatement or suppression of facts. The availability of ITC and the lawfulness of purchases hinge on the supplier's registration status at the relevant time and on demonstrable reality of transactions (invoices, e-way bills, transport documents, measurement slips, bank trail, books of account). Precedent Treatment: The Court relied on the administrative guidance (circular dated 13.12.2023) and accepted the principle that absent material of fraud/wilful misstatement/suppression the stringent provisions of section 74 should not be invoked. The Court also treated restoration of supplier registration as dispositive for the purpose of contesting the characterization of purchases as from an unregistered dealer. Interpretation and reasoning: The Court examined the record and found (a) the supplier's registration had been restored by a subsequent order and that fact was not disputed by the revenue; (b) the buyer produced multiple contemporaneous documents - tax invoices, e-way bills, transport bilties, KUMS documents, pre-arrival and pravesh parchi, measurement parchis - showing actual physical movement; and (c) payments were routed through banking channels with ledger/book entries matching the transactions. The Court reasoned that where the supplier's registration stands restored and the buyer has independent documentary evidence of actual receipt and payment, it is not tenable to treat purchases as from an unregistered or bogus supplier and to proceed under section 74 merely on the basis of prior cancellation of supplier registration. Ratio vs. Obiter: Ratio - where supplier's registration is restored and the taxpayer produces credible contemporaneous documents demonstrating physical movement and banking payments, invoking section 74 is not justified absent independent adverse material of fraud or suppression. Obiter - observations regarding the manner in which authorities 'brushed aside' documentary evidence are ancillary observations supporting the main conclusion. Conclusion: Proceedings under section 74 could not be sustained on the facts; orders predicated on the supplier being 'non-existing' or unregistered were legally untenable once restoration of registration and documentary evidence of genuine transactions were established. Issue 2: Binding effect and scope of the 13.12.2023 circular limiting invocation of section 74 Legal framework: Administrative circulars issued by superior authorities guide subordinate officers in invocation of statutory provisions; section 74 requires material establishing fraud, wilful misstatement or suppression for its invocation. Precedent Treatment: The Court treated the circular as binding on subordinate officers and relied on higher authority jurisprudence (as referred to in the judgment) for the proposition that such administrative instructions are to be followed by lower formations. Interpretation and reasoning: The circular was quoted and interpreted to mean that section 74(1) can be invoked only where investigation yields material evidence of fraud, wilful misstatement or suppression and that such material should be incorporated in the show cause notice. The Court read the circular and the statutory wording together to conclude that mere non-payment of GST or mere cancellation of supplier registration, without specific evidence of fraudulent evasion by the taxpayer, does not justify initiation of section 74 proceedings. The Court further noted that the circular requires the investigating officer to record and make part of the notice the evidence pointing to fraud or suppression. Ratio vs. Obiter: Ratio - administrative guidance that limits invocation of section 74 to cases with material evidence of fraud/suppression is binding on subordinate officers and non-compliance with that standard renders proceedings unsustainable. Obiter - broader remarks on policy considerations behind the circular are illustrative rather than determinative. Conclusion: The circular's conditions are binding on subordinate officers; in the absence of material evidencing fraud/wilful misstatement/suppression (and absent incorporation of such material in the show cause notice), proceedings under section 74 were improperly initiated. Issue 3: Sufficiency of material and effect of absence of adverse findings against the taxpayer Legal framework: For statutory penal/recovery provisions to be invoked, authorities must record material supporting the necessary factual conclusions (fraud, wilful misstatement or suppression). Administrative fairness requires that adverse inferences be grounded on adequate, articulated evidence. Precedent Treatment: The Court applied the principle that absent a finding or material pointing to fraud or suppression, authorities cannot lightly infer culpability; the circular reinforces this requirement. Interpretation and reasoning: The record lacked any specific finding that the buyer engaged in fraud, wilful misstatement or suppression. The supplier's registration restoration negated the core factual basis (supplier being non-existent/unregistered) for treating the purchases as bogus. Documentary proof of movement and banking payments remained unrebutted. The Court found the authorities had not pointed to discrepancies in ledgers or payment trails and had not made part of the show cause notice any material evidencing fraud as required by the circular. Ratio vs. Obiter: Ratio - in the absence of adverse material establishing the specific statutory causative elements (fraud, wilful misstatement or suppression), orders invoking section 74 and levying demands/penalty cannot stand. Obiter - critical language describing the authorities' treatment of documents as 'brushed aside' is a factual observation supporting annulment. Conclusion: Because no adverse material was recorded or incorporated to show fraud/wilful misstatement/suppression and because supplier registration was restored with contemporaneous transactional evidence uncontroverted, the impugned orders invoking section 74 were quashed. Cross-reference See Issue 1 and Issue 2: The combined effect of restoration of supplier registration and the circular's requirement of material evidence of fraud together underpin the Court's conclusion that section 74 proceedings were improperly initiated and could not be sustained.