Forensic audit warranted for GST proceedings where massive discrepancy exists between GST turnover and inflated ITR turnover declared for tender qualification; Huge GST vs ITR Turnover Gap Triggers Mandatory Forensic Scrutiny; Mechanical Reliance on ITR Turnover Rejected in GST Proceedings; Forensic Audit Ordered Where GST Turnover Differs Sharply From ITR; Section 74 GST Proceedings Require Proof of Actual Supplies, Not Assumptions.
The Madras High Court in M/s. K.N. Raj Constructions v. The State Tax Officer, Inspection Cell – 3, Hosur held that where there is a massive discrepancy between GST-reported turnover and the turnover declared in the Income Tax portal, GST liability under Section 74 of the CGST/TNGST Act cannot be fastened mechanically based solely on ITR figures. In this case, the Court noted a stark gap between bank receipts and GSTR-9 turnover of about ₹27.89 crore and an inflated ITR turnover of about ₹166.93 crore, which the assessee claimed was declared only to qualify for government tenders. Observing that precedents disallow treating such inflated figures as taxable turnover without verification, the Court directed a forensic audit by the GST Audit Wing to ascertain actual supplies and correct tax liability. The matter was remanded for fresh assessment post-audit within three months, subject to the assessee making a ₹30 lakh pre-deposit, upon which the bank account attachment would be lifted. The ruling emphasizes verification over assumptions in Section 74 proceedings.
Facts:
M/s. K.N. Raj Constructions (“the Petitioner”) is a partnership firm engaged in construction works and contract services, which had filed annual returns (GSTR-9) under the respective GST enactments reporting total outward supplies (turnover) of Rs. 26,89,76,834/- for the financial years 2017-18 to 2021-22, with corresponding bank receipts of Rs. 27,89,45,705/- during the relevant period.
The State Tax Officer, O/o. The Joint Commissioner, Hosur (“the Respondent”) passed assessment orders in DRC-07 dated November 08, 2024 under Section 74 of the CGST/TNGST Act for the periods 2017-18 to 2021-22, as rectified on November 11, 2024, raising a total demand of Rs. 55,86,77,302/- (including tax of Rs. 15,23,52,610/- plus interest and penalty under Sections 50 and 74), by treating the turnover declared by the Petitioner in the Income Tax portal as the correct taxable turnover, noting a massive discrepancy of Rs. 1,40,03,33,028/- between the GSTR-9 turnover and ITR turnover.
The Petitioner contended that the turnover declared in the Income Tax portal had been deliberately inflated and padded solely to qualify in the technical evaluation / bids for securing construction contracts in tenders floated by various Government departments and local bodies in Tamil Nadu, and that the actual supplies and bank receipts corresponded to the GSTR-9 figures; further, that the ITR turnover cannot form the basis for confirming GST demand under Section 74, particularly where the inflation was for tender qualification purposes only, and relied upon precedents holding that such inflated declarations for tender purposes do not constitute taxable turnover under sales tax / excise / GST regimes.
The Respondent contended that the Petitioner is bound by the turnover declared on the Income Tax portal for the respective financial years, and therefore the impugned assessment orders dated November 08, 2024 confirming tax liability under Section 9 read with Section 74 of the respective GST enactments do not merit interference, especially as these were the orders passed pursuant to remand by this Court in W.P. Nos. 14865 etc. of 2024 dated August 21, 2024. Further, that the Petitioner has an alternative appellate remedy under Section 107 and the writ petitions were filed belatedly.
Aggrieved by the impugned assessment orders passed under Section 74 and the fastened total liability of Rs. 55.86 crores despite prior recovery of Rs. 1.42 crores from the Petitioner’s bank account, the Petitioner approached the High Court by way of writ petitions seeking writ of certiorari to quash the impugned orders.
Issue:
Whether the impugned assessment orders passed under Section 74 of the CGST/TNGST Act confirming GST demand based on inflated turnover declared by the Petitioner in the Income Tax portal – which was allegedly padded solely for qualifying in technical bids of Government tenders – are sustainable?
Held:
The Hon’ble Madras High Court in W.P. Nos. 26637, 26639, 26643, 26651 & 26653 of 2025 held as under:
- Observed that, the Petitioner has explained that the inflated turnover in the Income Tax portal was deliberately done solely to qualify in the technical evaluation for securing contracts in tenders floated by the Government and various departments/local bodies of the State of Tamil Nadu, and that the actual bank receipts during the period were only Rs. 27,89,45,705/-, which tallies with the GSTR-9 figures, and that there are precedents from this Court, Tribunals and the Supreme Court holding that turnover inflated for tender qualification purposes cannot form the basis for sales tax / excise / GST demands.
- Observed that, the learned Government Advocate submitted that the GST Department’s audit team has already been directed to expeditiously carry out forensic examination of the Petitioner’s transactions.
- Held that, whether the Petitioner had indeed inflated the figures in the Income Tax portal solely for the purpose of securing contracts in the tenders floated by the respondents and various Government departments and local bodies requires a fresh look, and considering the huge difference between the bank receipts amounting to Rs. 27,89,45,705/- and the turnover reported in the Income Tax portal at Rs. 1,66,93,09,862/-, the records of the Petitioner require forensic examination to determine whether the Petitioner actually had such a high turnover during the relevant periods in dispute, and whether liability can be fastened solely on the basis of the turnover declared by the Petitioner in the Income Tax Portal.
- Directed that (i) there shall be an audit of the Petitioner’s records for the entire period in dispute by the auditing wing of the Respondents’ GST Department, with the Petitioner to cooperate by furnishing all data and documents, including passwords, for forensic examination of the books of accounts maintained physically and electronically; (ii) the Petitioner shall furnish all details of cash books, chitta, and any other records maintained by the Petitioner and shall not suppress any information required for the audit; (iii) the audit team shall endeavor to audit the Petitioner’s accounts and arrive at a conclusion regarding the actual or correct supplies (turnover) for the period in dispute as expeditiously as possible, preferably within a period of three months from the date of receipt of a copy of this order.
- Considering that this is the second round of litigation and the Department has been deprived of amounts otherwise payable had the Petitioner pursued statutory appeal under Section 107, directed the Petitioner to make a total pre-deposit of Rs. 30,00,000/- (Rupees thirty lakhs only) within eight weeks from the date of receipt of a copy of the order, subject to which the attachment of the Petitioner’s bank account shall stand automatically lifted upon confirmation of payment, with the amount to be directly transferred to the GST Department.
- Remitted the matter back to the Respondent to pass fresh orders on merits subject to completion of the aforesaid audit and compliance with the directions, and disposed of the writ petitions with the above observations; no costs.
Our comments:
The judgment underscores that where there is a stark discrepancy between turnover declared under GSTR-9 / bank records and figures reported in the Income Tax portal – particularly where the assessee claims inflation for tender qualification – mechanical reliance on ITR turnover to invoke Section 74 proceedings without forensic verification of actual supplies and receipts is unsustainable, warranting remand for GST Audit Wing scrutiny under Rule 142(1) or otherwise to ascertain true taxable turnover.
Relevant Provisions:
Section 74 of the CGST Act, 2017
74. Determination of tax, pertaining to the period up to Financial Year 2023-24, not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful- misstatement or suppression of facts.-
(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice….”
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