The Goods and Services Tax Appellate Tribunal (GSTAT), Thiruvananthapuram Bench, has held that mere availment of ineligible self-assessed Input Tax Credit (ITC), in the absence of evidence of fraud, wilful misstatement or suppression of facts with intent to evade tax, is not sufficient to invoke Section 74 of the CGST Act, 2017. The Tribunal further held that mere failure by a taxpayer to reply to an audit enquiry or final audit report would not, by itself, amount to suppression of facts.
The dispute arose from an audit of M/s. Santhome Latex Enterprises for the period from July 2017 to March 2022. A show cause notice was issued under Section 74(1) proposing recovery of alleged excess ITC for financial years 2017-18 to 2021-22, together with interest under Section 50 and penalty. The notice alleged, inter alia, that GST of Rs. 8,56,877 represented ineligible credit and that availment of such credit amounted to suppression of facts.
The original adjudicating authority dropped the demand under Section 74 after finding that the statutory ingredients necessary for invoking the provision had not been established. It recorded that the taxpayer had availed ITC through statutory returns and had filed GSTR-9C reconciliation statements and supporting documents on the GST portal. Consequently, there was no sufficient basis to establish fraud, wilful misstatement or suppression merely because certain ITC was found to be ineligible.
The Revenue challenged the order before the Joint Commissioner (Appeals), contending principally that the taxpayer had failed to furnish information sought during audit and had not replied to the audit enquiry or final audit report. The appellate authority accepted the Revenue’s appeal and reversed the original order. This resulted in the assessee approaching the GSTAT.
Ineligible ITC by Itself Is Not Suppression
The Tribunal closely examined the show cause notice and found that it contained no evidence establishing that the taxpayer knowingly availed ineligible ITC with an intention to evade tax. According to the GSTAT, even assuming that credit had been taken without proper verification of eligibility, there is no statutory presumption that such conduct automatically constitutes suppression.
The Tribunal categorically observed that every contravention of Sections 16(2) or 42(1) of the CGST Act cannot automatically attract proceedings under Section 74. For Section 74 to apply, there must be clear and categorical evidence showing that the contravention resulted from fraud, wilful misstatement or suppression of facts with intent to evade tax. Mere vague or bald assertions in a show cause notice are insufficient.
The GSTAT also referred to CBIC Instruction No. 05/2023-GST dated 13 December 2023, which states that Section 74(1) cannot be invoked merely because GST has not been paid or credit has been wrongly availed. There must be material evidence demonstrating fraud, wilful misstatement or suppression of facts to evade tax, and such evidence must form part of the show cause notice. The Tribunal found that the notice in the present case failed these requirements.
New Grounds Cannot Be Introduced at Appellate Stage
An important aspect of the ruling concerns the Revenue’s attempt to justify Section 74 proceedings on the ground that the taxpayer had failed to reply to the audit enquiry and final audit report.
The Tribunal found that this allegation did not form part of the original show cause notice. Introducing such a fresh ground at the appellate stage was held to be contrary to the fundamental principles of natural justice.
The GSTAT further noted that the Order-in-Appeal did not identify what specific information had been sought from the taxpayer, when such information had been called for, or the statutory provision under which it was sought. It also failed to explain how the alleged non-response established suppression.
The Tribunal therefore held that the appellate authority could not sustain a Section 74 demand on a ground which was absent from the foundational show cause notice.
Disclosure Through GSTR-9C Was Material
The Tribunal also gave significance to the finding that the proceedings arose from information already contained in statutory records such as GSTR-2A, GSTR-3B, GSTR-9C and annual return reconciliation records. The invoice-wise reconciliation explaining the alleged ITC difference had already been uploaded through the statutory filings and was available on the common GST portal.
Accordingly, the appellate authority could not reverse the original adjudication order without dealing with or dislodging the factual finding that the relevant information had already been disclosed by the taxpayer. The GSTAT held that the Order-in-Appeal suffered from non-application of mind on this count.
GSTAT’s Final Ruling
Answering both questions framed for consideration in the negative, the GSTAT held that, in the absence of evidence to the contrary, mere availment of ineligible self-assessed ITC in the Electronic Credit Ledger does not amount to suppression of facts so as to attract Section 74(1) of the CGST Act.
It further held that mere failure to reply to an audit enquiry or final audit report does not, in the absence of other evidence, constitute suppression of facts under Section 74.
Consequently, the Tribunal set aside the Order-in-Appeal and allowed the appeal with consequential relief.
Key Takeaway
The ruling reinforces the distinction between an incorrect availment of ITC and conduct involving fraud, wilful misstatement or suppression with intent to evade tax. Section 74, which carries serious consequences including an enhanced penalty framework, cannot be invoked merely because credit is subsequently considered ineligible. The necessary ingredients for invoking Section 74 must be specifically alleged and supported by evidence in the show cause notice itself.
It also reiterates an important procedural principle: the Revenue cannot cure deficiencies in a show cause notice by introducing an entirely new allegation at the appellate stage.
