Input tax credit and goods movement shown in GSTR returns-s.74 fraud/suppression not pleaded; proceedings quashed, writ allowed.

Proceedings initiated under s. 74 of the SGST Act were held without jurisdiction because the show cause notice failed to plead the mandatory jurisdictional ingredients of fraud, wilful misstatement, or suppression of facts leading to wrongful or excessive input tax credit; absent such averments, the authority could not assume s. 74 jurisdiction, resulting in quashing of the proceedings and consequential orders. On merits, the HC noted that the movement of goods and transactions were reflected in statutory returns (GSTR-1, GSTR-2A and GSTR-3B) and tax stood deposited, which was not specifically denied by the State; therefore, adverse inference was unjustified and reliance on SC precedent was inapplicable, leading to allowance of the writ.

---

---

1. ISSUES PRESENTED AND CONSIDERED

(i) Whether initiation and culmination of proceedings under Section 74 were without jurisdiction because the show cause notice/assessment did not contain the essential and specific allegations/findings of fraud, wilful misstatement, or suppression of facts for wrongful availment/utilisation of input tax credit.

(ii) Whether the State GST authority lacked jurisdiction to proceed against the taxpayer when it was specifically pleaded that the taxpayer fell under Central GST jurisdiction and no material was shown by the State to justify assumption of jurisdiction (including on the pleaded absence of cross-empowerment).

(iii) Whether adverse findings of "circular trading" and lack of physical movement of goods were sustainable where documentary evidence (tax invoices, e-way bills, bilty, returns/GSTR data, and banking-channel payments) existed, and where the revenue relied on the taxpayer's non-production of toll plaza receipts despite no statutory requirement being shown.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Jurisdictional validity of Section 74 proceedings in absence of foundational ingredients

Legal framework (as discussed by the Court): The Court examined the nature of proceedings under Section 74 and held that invocation of Section 74 necessarily presupposes allegations of wrongful availment/utilisation of input tax credit by reason of fraud, wilful misstatement, or suppression of facts. The show cause notice must expressly indicate such foundational ingredients, because the adjudicating authority derives jurisdiction to proceed under Section 74 only when these ingredients are present.

Interpretation and reasoning: The Court found from the record that neither the show cause notice nor the assessment order recorded any finding-supported by evidence-attributing the alleged tax/ITC irregularity to fraud, wilful misstatement, or suppression. The Court treated this deficiency as going to the root of jurisdiction, rendering the entire Section 74 proceeding vitiated. The Court expressly applied the principle that where the "basic ingredient" is missing in the notice/order, the proceeding becomes without jurisdiction.

Conclusion: The Court conclusively held that, since the essential Section 74 ingredients were absent from the notice and not established by evidence in the adjudication, initiation of proceedings under Section 74 itself "ought not to have been" made and the resulting orders could not be sustained.

Issue (ii): Lack of demonstrated jurisdiction of State GST authorities (including absence of justification for assuming jurisdiction)

Legal framework (as discussed by the Court): The Court addressed the taxpayer's specific pleading that it fell within Central GST jurisdiction and that State authorities lacked jurisdiction, including the contention that cross-empowerment enabling State action was not shown.

Interpretation and reasoning: The Court recorded that this jurisdictional objection had been raised both before the authorities and before the Court. However, it found that neither the impugned orders nor the counter affidavit produced any material to justify how the State GST authority acquired jurisdiction to initiate and conclude the proceedings against the taxpayer. The Court treated the failure to place any such justification on record as a decisive infirmity supporting the challenge to the proceedings.

Conclusion: The Court held that the State authorities failed to justify their jurisdiction to proceed, which contributed to the conclusion that the impugned orders were unsustainable.

Issue (iii): Sustainability of "circular trading"/no movement findings; adverse inference from non-production of toll receipts

Legal framework (as discussed by the Court): The Court evaluated the evidentiary basis required to sustain allegations of circular trading and absence of physical movement, and whether the revenue could insist on toll plaza receipts absent any cited provision under the GST Act/Rules.

Interpretation and reasoning: The Court found that purchases and sales were reflected in books of accounts and in GSTR-1, GSTR-2A, and GSTR-3B; transactions were declared on the GST portal; and payments were made through banking channels with supporting statements and ledgers. The Court held that the authorities brushed aside this evidence merely on the basis of survey. It further relied on the fact that proceedings against one supplier (relied upon by the department) had been set aside and not shown to have been overturned; therefore, no adverse inference could be drawn against the taxpayer on that basis. The Court also held that the inference drawn against the taxpayer for not producing toll plaza receipts was "patently/apparently perverse" because the revenue could not point to any statutory provision requiring toll receipts as proof of movement; meanwhile, e-way bills, bilty, tax invoices, transporter payments and ledgers were on record and no defects were pointed out therein. On these facts, the Court held that no case of circular trading was made out.

Conclusion: The Court conclusively rejected the revenue's adverse inference based on toll plaza receipts, found the "circular trading" allegation unsupported by material on record, and held that the impugned orders could not be justified on the evidence relied upon by the department.

Relief and final determination

The Court quashed the impugned orders and allowed the writ petition. It further directed that any amount deposited be refunded in accordance with law within one month from production of a certified copy of the order.

---