Raj Jaggi
Section 74 Requires More Than Ineligible ITC
A taxpayer may take a tax position which is later found to be incorrect or may avail ITC which is ultimately held to be inadmissible. Such an error may justify reversal or recovery of the credit in accordance with law, but it does not automatically mean that the taxpayer acted fraudulently or intended to evade tax. A wrong claim and a deliberate attempt to evade tax are not the same thing. For invoking Section 74, the Department must establish something more—fraud, wilful misstatement or suppression of facts with intent to evade tax.
This distinction came into sharp focus before the GST Appellate Tribunal, Thiruvananthapuram Bench in M/s Santhome Latex Enterprises v. Commissioner of CGST, Thiruvananthapuram, 2026-VIL-61-GSTAT-TVP , decided on 21.08.2026. The Department sought to treat the alleged availment of ineligible ITC itself as suppression, but the Tribunal found no evidence showing that the taxpayer knowingly availed inadmissible credit with intent to evade tax. On the contrary, the relevant ITC reconciliation had been disclosed through GSTR-9C/annual return filings and was available on the GST portal. The ruling therefore reinforces a crucial distinction under Section 74: wrongful ITC may establish a tax discrepancy, but it does not establish suppression unless the Department separately proves the culpable conduct required by the provision.
The Dispute Arose from Audit of ITC
M/s Santhome Latex Enterprises was subjected to audit for the period July 2017 to March 2022. On the basis of the audit findings, a Show Cause Notice was issued under Section 74(1) of the CGST Act proposing recovery of allegedly excess ITC, together with interest and penalty. The Department alleged that the taxpayer had availed ineligible ITC without properly verifying whether the statutory conditions for taking such credit had been satisfied. More importantly, the notice proceeded on the basis that such wrongful availment of ITC itself amounted to suppression of facts with intent to evade tax.
The Adjudicating Authority did not accept this approach. It found that the ITC had been availed on the basis of inward supply invoices and that the taxpayer had reconciled the credit claimed in its GST returns with the financial statements through Form GSTR-9C. The relevant documents had also been uploaded on the GST portal. These disclosures were considered inconsistent with the allegation that the taxpayer had deliberately concealed material facts from the Department.
In the absence of evidence establishing fraud, wilful misstatement or suppression with intent to evade tax, the Adjudicating Authority held that the essential conditions for invoking Section 74 had not been established. Since the SCN had been issued specifically under Section 74 and did not provide for confirmation of the demand under Section 73, the proposed demand was dropped along with the consequential interest and penalty.
Departmental Appeal Introduced a Different Basis for Suppression
The Department challenged the Order-in-Original before the Joint Commissioner (Appeals), contending that the taxpayer had failed to reply to the audit enquiry and final audit report and that such failure amounted to suppression under Explanation 2 to Section 74. The First Appellate Authority accepted this contention and reversed the Order-in-Original. However, this ground had not formed part of the original SCN, which had essentially treated the alleged wrongful availment of ITC itself as suppression.
The controversy before GSTAT therefore centred on whether wrongful availment of ITC, without evidence of culpable conduct, could constitute suppression; whether failure to respond during audit could amount to suppression when the relevant information was already disclosed through statutory filings; and whether Section 74 could be sustained at the appellate stage on a ground not contained in the original SCN.
Wrongful ITC and Suppression Are Not Interchangeable Concepts
The Tribunal found that the SCN contained no evidence to establish that the taxpayer knowingly availed inadmissible ITC. Mere failure to properly verify eligibility could not automatically amount to suppression. For invoking Section 74, the Department had to establish the additional element of fraud, wilful misstatement or suppression with intent to evade tax; every contravention of Sections 16(2) or 42(1) could not be treated as such merely because the credit was subsequently found inadmissible.
The distinction is important: ineligibility concerns the correctness of the claim, whereas suppression concerns the conduct accompanying it. An incorrect ITC claim may therefore justify consequences under the law, but it cannot by itself establish the culpable conduct required for Section 74. The Tribunal accordingly rejected the proposition that mere availment of ineligible or excess ITC amounted to suppression.
CBIC Itself Requires Evidence Before Section 74 Is Invoked
The Tribunal referred to CBIC Instruction No. 05/2023-GST dated 13.12.2023, which clarifies that Section 74(1) should be invoked only where there is material evidence of fraud, wilful misstatement or suppression of facts with intent to evade tax. Such evidence must form part of the Show Cause Notice; mere allegation of suppression or non-payment of tax is not sufficient.
The SCN in the present case, though issued after the Instruction, contained no material evidence establishing the requisite culpable conduct. The Tribunal therefore found that vague or bald assertions of fraud, wilful misstatement or suppression could not satisfy the statutory requirements for invoking Section 74.
Suppression Must Be Wilful
The Tribunal relied upon the Supreme Court decision in Cosmic Dye Chemical v. Collector of Central Excise, Bombay, 1994-VIL-19-SC-CE , which, while interpreting similar expressions under the Central Excise law, emphasised that misstatement or suppression must be wilful and accompanied by intent to evade duty. A mere incorrect statement or omission, without the necessary culpable element, cannot constitute suppression attracting the more stringent statutory consequences.
Applying this principle to GST, mere inadmissibility of an ITC claim cannot by itself establish suppression under Section 74. The Department must demonstrate through the notice and supporting material that the incorrect claim involved deliberate misstatement or concealment with intent to evade tax.
Mere Omission Is Not Suppression
The Tribunal also relied upon Commissioner of Central Excise, Nagpur v. Ballarpur Industries Ltd., 2007-VIL-29-SC-CE , where the Supreme Court held that “suppression” must be construed strictly. Mere omission to furnish correct information does not constitute suppression unless it is wilful and intended to evade duty. Similarly, an incorrect statement does not become a wilful misstatement unless made with knowledge of its incorrectness.
This principle directly bears upon Section 74 of the CGST Act, which requires the tax shortfall or wrongful ITC to arise by reason of fraud, wilful misstatement or suppression of facts to evade tax. Where the relevant facts are already disclosed through GST returns, Form GSTR-9C or other statutory filings, mere detection of an ITC discrepancy from those disclosures cannot establish suppression. The Department must additionally show deliberate concealment or wilful non-disclosure with intent to evade tax; otherwise, the essential foundation for invoking Section 74 is absent.
Information Already on the GST Portal Cannot Easily Be Called Suppressed
The taxpayer had reconciled the ITC claimed in its returns with its financial statements through Form GSTR-9C and uploaded the relevant documents on the GST portal. The Adjudicating Authority therefore found no fraud, wilful misstatement or suppression. Where the very discrepancy relied upon by the Department emerges from statutory disclosures already available on the portal, an allegation that the same information was suppressed requires clear supporting evidence.
The Tribunal further found that the First Appellate Authority had neither considered nor displaced the finding that the relevant reconciliation was already disclosed through Form GSTR-9C/annual return filings. This omission materially weakened the allegation of suppression and contributed to the finding that the appellate order suffered from non-application of mind.
Audit Non-Response Is Not Suppression
The Department relied upon the taxpayer’s failure to reply to the audit enquiry and final audit report, invoking Explanation 2 to Section 74, which included failure to furnish information when asked for in writing by the proper officer within the meaning of “suppression”. The Tribunal, however, found that the relevant information and reconciliation were already available through statutory filings and that there was no statutory requirement to furnish a written reply to the final audit report.
Mere non-response during audit could therefore not, by itself, establish suppression attracting Section 74. Procedural non-response cannot be equated with culpable suppression unless the facts and evidence establish the statutory requirement of deliberate non-disclosure with intent to evade tax.
New Grounds Cannot Be Introduced in Appeal
The original SCN treated the alleged wrongful availment of ITC itself as suppression under Section 74. It did not allege that failure to reply to the audit enquiry or final audit report constituted suppression. That factual ground was introduced by the Department only while challenging the Order-in-Original, and was subsequently relied upon by the First Appellate Authority to reverse the adjudication order.
The objection was therefore not merely that a new argument had been raised in appeal, but that a new factual foundation for invoking Section 74 had been introduced after issuance of the SCN. Since the taxpayer had never been called upon in the notice to answer that allegation, the appellate authority could not use it to cure the deficiency in the Department’s original case. The Tribunal accordingly found the Order-in-Appeal unsustainable on grounds of natural justice and non-application of mind.
The SCN Must Contain the Factual Foundation
Mere use of expressions such as “fraud”, “wilful misstatement”, “suppression” or “intent to evade” cannot justify invocation of Section 74. The SCN must disclose the foundational facts and material showing how the alleged tax default or wrongful ITC arose by reason of the culpable conduct contemplated by Section 74.
The wider principle emerging from the Tribunal’s reasoning is that a tax contravention and the culpable conduct required for Section 74 are separate requirements. A wrong ITC claim or other statutory default may establish tax liability, but Section 74 requires something further—specific facts and evidence connecting that default with fraud, wilful misstatement or suppression with intent to evade tax. The statutory labels cannot substitute for that evidentiary foundation
Author's Note - Recent Supreme Court Rulings Reinforce the Tribunal’s Approach
The Tribunal’s reasoning finds strong support in two recent Supreme Court decisions. In M/s G.R. Infra Projects Limited, Ratlam v. State of Madhya Pradesh & Others, 2026-VIL-86-SC , it was emphasised that mere use of expressions such as fraud or suppression cannot justify Section 74; the foundational facts supporting such allegations must emerge from the SCN itself. In M/s Tata Steel Limited v. Union of India & Others, 2026-VIL-87-SC , the Supreme Court further clarified that the officer’s satisfaction must extend beyond the existence of a tax discrepancy to the culpable conduct required for invoking Section 74.
Read together with Santhome Latex Enterprises, these decisions reinforce an important principle: a tax discrepancy and culpable conduct under Section 74 are distinct requirements. Mere inadmissibility of ITC cannot, without specific facts and evidence of fraud, wilful misstatement or suppression with intent to evade tax, justify invocation of Section 74.
A Significant Ruling for Section 74 Litigation
The Tribunal ultimately found that the Show Cause Notice did not contain the necessary foundation for invoking Section 74. Mere availment of ineligible ITC could not, without supporting evidence, be treated as fraud, wilful misstatement or suppression with intent to evade tax. Similarly, failure to respond during audit could not by itself establish suppression when the relevant information and reconciliation had already been disclosed through statutory filings. The Order-in-Appeal was therefore set aside and the appeals were allowed with consequential relief.
The importance of Santhome Latex Enterprises lies in the clear distinction it draws between a tax error and tax evasion. A taxpayer may wrongly avail ITC and may consequently be required to reverse or repay that credit in accordance with law. But that does not automatically justify invoking Section 74. The Department must separately establish, through specific facts and evidence, that the wrongful availment was connected with the culpable conduct contemplated by the provision.
The ruling thus carries an important message for Section 74 proceedings: tax liability and culpability are separate questions. The existence of an incorrect ITC claim may establish the former, but it does not automatically establish the latter. Fraud, wilful misstatement or suppression with intent to evade tax cannot be presumed merely from an inadmissible claim; the factual and evidentiary link between the tax default and the alleged culpable conduct must be established.
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