The Allahabad High Court, in M/s Safecon Lifescience Private Limited v. Additional Commissioner Grade-2 & Another, delivered an important judgment concerning denial of Input Tax Credit (ITC) and the scope of proceedings under Section 74 of the UPGST/CGST Act. The Court emphasized that proceedings under Section 74 can be initiated only where there is material establishing fraud, wilful misstatement, or suppression of facts with an intent to evade tax. Mere suspicion arising from the supplier’s transactions is insufficient. The Supreme Court subsequently declined to interfere and dismissed the Special Leave Petition, thereby leaving the High Court’s decision undisturbed.
Background
The petitioner, engaged in the wholesale trading and manufacture of pharmaceutical products, purchased goods from a registered supplier, M/s Unimax Pharma Chem, against valid tax invoices, e-way bills, transport documents, and payments made through banking channels. The supplier had also filed GSTR-1 and GSTR-3B and the transactions were reflected on the GST portal.
Despite these facts, the department initiated proceedings under Section 74 alleging wrongful availment of ITC on the basis of intelligence suggesting irregularities in the supplier’s procurement chain. The adjudicating authority denied ITC and the appellate authority affirmed the demand.
Key Findings of the High Court
The High Court quashed both the adjudication and appellate orders after holding that:
- The petitioner had produced substantial evidence proving actual movement of goods, genuine tax invoices, e-way bills, transport documents and payment through banking channels.
- The department failed to rebut this evidence with any independent investigation.
- Proceedings were initiated merely on the basis of information received from the Central Intelligence Unit without verification.
- The material relied upon against the petitioner was never supplied to it, violating principles of natural justice.
- No finding was recorded that the petitioner had committed fraud, wilful misstatement or suppression of facts with intent to evade tax.
- Section 74 cannot be invoked merely because doubts exist regarding transactions undertaken by the supplier or its vendors.
- The authorities ignored the CBIC Circular dated 13 December 2023 clarifying that Section 74 requires evidence of fraud or wilful suppression before issuance of a show cause notice.
Legal Principles
The judgment reiterates several significant principles under GST law:
- Genuine purchasers cannot automatically be denied ITC solely because irregularities are alleged against suppliers or upstream dealers.
- Actual movement of goods, valid tax documents, GST returns and banking transactions constitute strong evidence supporting the genuineness of transactions.
- Intelligence reports cannot form the sole basis of adverse action unless independently verified.
- Material relied upon by the department must be disclosed to the taxpayer.
- Invocation of Section 74 requires clear evidence of fraud, wilful misstatement or suppression with intent to evade tax.
- The Court relied upon the Supreme Court’s decision in Continental Foundation Joint Venture Holding v. Commissioner of Central Excise, reiterating that suppression must be deliberate and accompanied by intent to evade tax.
Supreme Court’s Decision
The revenue challenged the Allahabad High Court’s judgment before the Supreme Court by filing SLP (C) No. 23993 of 2026. By order dated 17 July 2026, the Supreme Court condoned the delay but found no ground to interfere and dismissed the Special Leave Petition, thereby allowing the High Court’s judgment to stand.
Why This Judgment Matters
This ruling provides significant protection to bona fide taxpayers. It reinforces that ITC cannot be denied merely because the department suspects irregularities in the supplier’s transactions. Revenue authorities must independently establish fraud or deliberate suppression before invoking Section 74. The judgment also strengthens procedural safeguards by insisting on disclosure of relied-upon material and adherence to principles of natural justice. It will be particularly relevant in disputes involving blocked ITC, fake invoice allegations, supplier defaults, and Section 74 proceedings.
