The Allahabad High Court has ruled that the GST ( Goods and Services Tax ) Department cannot invoke Section 74 of the CGST Act in the absence of findings of fraud, wilful misstatement, or suppression of facts with intent to evade tax.
The appellate order’s part has been quashed by the court that kept the tax and penalty against M/s S.A. Iron & Alloys Pvt. Ltd., keeping in mind that neither the adjudicating authority nor the appellate authority recorded the obligatory conditions needed for initiating proceedings under Section 74.
On 1 December 2018, a survey was to be done for the applicant, S.A. Iron & Alloys Pvt. Ltd, a manufacturer of sponge iron and MS ingots, during which the department claimed to have found excess stock, allegedly based only on eye measurement rather than physical weighing.
Under Section 130, read with c, penalty proceedings were launched; however, these were quashed subsequently via the first appellate authority in January 2023. After more than 3 years of the survey, a Show Cause Notice (SCN) u/s 74 has been issued by the department alleging suppressed production based on electricity consumption and discrepancies in reported stock.
Even after the taxpayer filed a detailed response, the adjudicating authority levied tax, interest, and penalty via an order on 10 June 2022. But the applicant’s appeal was permitted, dated 24 February 2023, the appellate authority still kept part of the demand without addressing the statutory requirements for invoking Section 74.
It was observed by the HC that no findings were recorded by any authority that the taxpayer had taken ITC or conducted transactions via fraud, wilful misstatement, or suppression of facts, conditions that are mandatory for invoking Section 74 rather than Section 73.
The Court placed significant reliance on its earlier ruling in M/s Diamond Steel v. State of U.P. (2023), where it was held that the department must clearly establish the presence of fraud-related elements before invoking Section 74.
Read Also: Allahabad HC: Fraudulent GST ITC Claims Without Actual Supply Covered U/S 74 of CGST Act
The bench stated that mere stock mismatch, alleged excess production, or reliance on electricity consumption data could not explain invoking Section 74 unless accompanied by a clear finding of dishonest intent.
Both the adjudicating authority and the appellate authority are condemned by the bench of Justice Piyush Agarwal for quantifying tax and penalty without revealing any legal or factual reasoning, noting that such action was “not in consonance with the mandate of Section 74.”
Allahabad High Court ruled that the appellate order cannot persist without foundational findings of fraud, and modified the order to the extent it sustained liability against the taxpayer.
The writ petition has been permitted, and the authorities have been asked to refund any amount deposited by the applicant, including a 4% per annum interest from the date of deposit, within two months of receipt of the order.
| Case Title | M/s S.A. Iron & Alloys Pvt. Ltd vs. State of U.P. and 4 Other |
| Case No. | WRIT TAX No. – 735 of 2023 |
| Counsel for Petitioner | Aloke Kumar |
| Counsel for Respondents | C.s.c |
| Allahabad High Court | Read Order |
