In a significant relief to GST taxpayers, the Allahabad High Court has clarified the scope and limits of proceedings under Section 74 of the GST law. The Court held that tax authorities cannot invoke Section 74 mechanically or merely on suspicion, without clearly establishing fraud, wilful misstatement or suppression of facts with intent to evade tax.
The case involved a GST-registered company engaged in the supply of agricultural goods. The State GST authorities initiated proceedings alleging circular trading and wrongful availment of input tax credit, primarily relying on survey findings. Despite the taxpayer producing complete documentation such as tax invoices, e-way bills, transporter records, bank statements and GST returns, adverse orders were passed and confirmed in appeal.
The High Court observed that Section 74 is a stringent provision and can be applied only when the show cause notice itself discloses specific material indicating fraud or deliberate suppression. In this case, the Court found that neither the notice nor the final order recorded any concrete finding of fraud. As a result, the entire proceedings were held to be without jurisdiction.
A key issue examined by the Court was the insistence of the department on production of toll plaza receipts as proof of movement of goods. The Court categorically held that GST law does not require toll receipts to establish movement when statutory documents such as e-way bills, bilties and transporter payments are available. Drawing adverse inference on this basis was held to be arbitrary and unsupported by law.
The Court also took note of the fact that proceedings against one of the suppliers, on whose transactions allegations were raised, had already been dropped by the competent authority. Once proceedings against the supplier were set aside, the same transactions could not be used to accuse the taxpayer of circular trading.
Importantly, the Court reiterated that GST has been introduced to promote ease of doing business and that authorities must act within the framework of law. Genuine transactions reflected in GST returns and supported by banking channels cannot be disregarded merely on suspicion or post-survey assumptions.
Accordingly, the Allahabad High Court quashed the entire demand and appellate orders and directed refund of the amount deposited by the taxpayer.