Section 74 as a Weapon for 26AS vs GSTR‑1 B2B Mismatches: Why Bona Fide GST Dealers Are Being Treated as Fraudsters
1. The new pattern: Section 74 notices based on 26AS vs GSTR‑1 (B2B only)
In recent months, many dealers in Karnataka have started receiving notices under Section 74 of the GST Act for the financial year 2020‑21 based on a common template. The source mentioned in several notices is a central CCT order (Adcom (Audit I & C) JDN/CR/2022‑23 dated 20.02.2023), and the allegation is that B2B outward supplies as per 26AS do not match with B2B figures in GSTR‑1.
In one of my client’s cases, the facts are straightforward:
For FY 2020‑21, the client has correctly declared outward supplies in the books, in GSTR‑1, in GSTR‑3B and in GSTR‑9:
– B2C outward: about ₹1,17,08,788.19
– B2B outward: about ₹63,16,261.00
The same sales turnover is disclosed in the income‑tax return and is fully reconcilable with Form 26AS.
There is no difference between the total turnover in GST and in income‑tax records; the figures tally.
Despite this, the department has taken only B2B figures appearing in 26AS, ignored the B2C supplies, done an incomplete “match” with GSTR‑1, treated the alleged difference as suppressed B2B turnover, and issued an intimation under Section 74(5) in DRC‑01A proposing tax + interest + 100% penalty of about ₹49,16,182.
On the portal, there is no tax difference once B2B and B2C are both considered. The entire demand is a product of partial reading of data and a mechanical template. Yet the notice uses Section 74, which is meant only for fraud, wilful misstatement, or suppression.
2. What Section 74 is really meant for
Section 74 of the CGST Act is a serious provision. It is designed for cases where tax is not paid, short paid, ITC is wrongly availed/used, or refund is erroneously granted “by reason of fraud, or any wilful misstatement, or suppression of facts to evade tax.”
Typical patterns where Section 74 is justified include:
Fake invoices and bogus ITC without actual supply.
Intentional under‑reporting of turnover or hiding branches.
Collecting tax from customers but not depositing it.
Deliberate misclassification or misreporting with clear intent to evade.
Courts and commentaries have repeatedly emphasised that:
Fraud / suppression / wilful misstatement are jurisdictional facts for invoking Section 74 and the extended limitation.
An officer cannot merely reproduce figures; he must have some material to show deliberate intent to evade.
Mere reconciliation differences or return mismatches without intent do not justify Section 74; these should be handled under Section 73 (or now 74A), where the limitation is shorter and penalty is lower.
When the department uses Section 74 only because Section 73 has become time‑barred, without proving fraud, the action becomes colourable and contrary to the scheme of the Act.
3. Why using Section 74 for 26AS vs GSTR‑1 B2B mismatch is problematic
In these Karnataka cases, the pattern is:
Department looks only at B2B figures in Form 26AS (TDS/TCS‑reflected transactions).
Compares them with B2B figures in GSTR‑1.
Ignores B2C supplies (no TDS/TCS, so not in 26AS).
Treats difference as “short‑reported B2B”, ignoring that total turnover (B2B + B2C) in GSTR‑1 and GSTR‑9 is fully disclosed and matches books and income‑tax.
Straightaway invokes Section 74, proposing tax, interest and 100% penalty on the alleged difference.
There are several legal and practical defects in this approach:
26AS is not a complete turnover register
– 26AS captures transactions subject to TDS/TCS; it never shows B2C cash/retail sales.
– Matching only B2B part with 26AS and treating the rest as suspicious ignores the nature of the business and its B2C base.
All turnover is already in the open
– Turnover is disclosed in GSTR‑1 and GSTR‑9 and in the income‑tax return.
– There is no hidden or second set of books.
– When revenue already knows total turnover through both tax codes, alleging “suppression” is artificial.
No material is shown of fraud, suppression or false documents
– Notices do not show any bogus invoices, missing stocks, or unaccounted bank credits.
– They rely purely on a partial data‑match, not on any investigation.
Section 74 is used only because Section 73 is time‑barred
– For 2020‑21, limitation under Section 73 has expired; only Section 74 orders can still be passed until 31‑08‑2026.
– Many notices appear to adopt Section 74 simply to get a longer limitation, not because there is real fraud.
This is exactly the misuse that courts across India are now criticising. Delhi High Court, in a recent case concerning GSTR‑1 vs GSTR‑3B differences, held that Section 74 cannot be used merely for mismatches or computational errors; clear evidence of fraud or suppression is required. Allahabad High Court, in Safecon Lifescience, held that where movement of goods and genuine transactions are proved, Section 74 proceedings are unjustified and reflect harassment in the name of GST.
Commentaries summarise this line as: “Section 74 is for fraud, not for routine mismatches.”
4. Natural justice and the duty to verify portal data
Another serious concern is the lack of basic verification before issuing Section 74 notices:
All data is already available to the officer: GSTR‑1, GSTR‑3B, GSTR‑9, and even e‑way bill and 26AS trails.
Yet, notices are being issued without reconciling B2B + B2C and without confirming whether tax has already been fully paid.
Demand is lifted directly from internal “reports” or higher authority instructions and converted into DRC‑01A templates.
Principles of natural justice and good tax administration demand that:
Before alleging serious things like fraud or suppression, the officer must cross‑check the taxpayer’s records, not blindly trust a partial dataset.
Show‑cause notices, especially under Section 74, must be speaking notices: they must explain how fraud/suppression is inferred, not merely reproduce a demand figure.
Supreme Court and High Courts have repeatedly held that cut‑paste or vague notices and orders are vulnerable and can be quashed where they show non‑application of mind.
In effect, if the department will not take two hours to reconcile the data that the dealer has already filed, but issues a Section 74 notice proposing huge tax, interest and 100% penalty, it is clear that the weapon is being used mechanically. This is contrary to the spirit of GST and contrary to the promise of “ease of doing business”.
5. What bona fide dealers should do when such notice arrives
When a Section 74‑based DRC‑01A lands for 2020‑21 on this pattern, the dealer should not keep silent. Silence will later weaken any natural‑justice argument.
A practical approach:
Prepare a full reconciliation
– Books vs GSTR‑1 vs GSTR‑3B vs GSTR‑9 vs 26AS.
– Show clearly that:
B2B + B2C turnover in GST equals turnover in books and income‑tax.
There is no additional turnover missing from GST vis‑à‑vis income‑tax.
File a detailed reply to DRC‑01A
– Deny fraud, wilful misstatement, or suppression with reasons.
– Explain B2C portion which 26AS will never show.
– Point out that tax has already been fully discharged in GSTR‑3B, so there is no revenue loss.
– Rely on Section 73 vs 74 distinction: this is at the most a reconciliation issue, not a fraud case; Section 73 is already time‑barred and cannot be reopened through Section 74.
Cite case law and jurisprudence
– Delhi HC: Xiaomi Technology India Pvt. Ltd. – Section 74 misuse for mismatches; fraud evidence mandatory.
– Allahabad HC: Safecon Lifescience Pvt. Ltd. – Section 74 unjustified when movement of goods is proven; harassment criticised.
– Commentaries and CBIC instructions summarising that extended‑period provisions like Section 74 demand proof of fraud/suppression, not just unverified “intelligence” or internal reports.
Request a personal hearing and reasoned decision
– Insist on a hearing under Section 75(4), and put on record a written request.
– If the notice is vague, ask for underlying working and basis.
If a DRC‑01 (SCN) is later issued
– Repeat the above in the formal reply and consider a writ petition if:
fraud is not properly alleged,
total turnover and tax already paid are ignored, or
the notice appears to use Section 74 only to avoid limitation.
6. Why these matters for policy and natural justice
The problem is not that the department looks at data. Data‑driven risk alerts are useful. The problem is when data becomes a substitute for law and fact‑finding.
What we are seeing in Karnataka from 2020‑21 onwards is:
Section 74 being used as a default weapon whenever Section 73 is time‑barred.
Multiple notices being issued in bulk based on partial matches, often without basic portal reconciliation.
Genuine dealers—with full records, matched books, and tax already paid—receiving large demands with 100% penalty, only because a report was forwarded.
This creates:
Unnecessary litigation and compliance burden on small and medium businesses.
Loss of faith in GST’s promise of being a fair, system‑driven tax.
A sense that bona fide taxpayers are soft targets, while the real fraudsters vanish early.
Natural justice in GST is not an optional courtesy. It is a legal discipline: reasoned notices, tangible evidence, fair hearing, and proportionate use of powers. When these elements are missing, the system stops distinguishing between genuine mistakes and real evasion.
7. A closing thought
As practitioners and taxpayers, we are not against reconciliation or even tough action where there is real fraud. But Section 74 is not meant for routine 26AS vs GSTR‑1 differences, especially where total turnover and tax are fully declared.
Before branding someone as a fraudster and proposing 100% penalty, the department must first look at its own portal, the dealer’s books, and the truth that is already on record. Otherwise, Section 74 becomes less a shield against evasion and more a sword over the heads of bona fide dealers.
If the administration wants respect for GST, it must use powerful tools like Section 74 carefully, based on evidence and law, not on templates and time -bar anxiety.
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