Introduction
In a significant development under the GST regime, the Principal Bench of the Goods and Services Tax Appellate Tribunal (GSTAT), New Delhi, in M/s Sterling & Wilson Pvt. Ltd. v. Commissioner, Odisha Commissionerate of CT & GST & Ors. [2026 (2) TMI 726 – GSTAT New Delhi], has held that a mere mismatch between figures reported in GSTR-1 and GSTR-3B cannot, by itself, justify invocation of proceedings under Section 74 of the CGST Act, 2017.
The ruling assumes considerable importance, particularly in cases where show cause notices are issued solely on the basis of system-generated discrepancies without conducting any reconciliation exercise or establishing fraudulent intent.
Facts of the Case
The appellant, M/s Sterling & Wilson Pvt. Ltd., was subjected to scrutiny by the GST department for FY 2018-19. During the course of scrutiny, the department observed that the tax liability disclosed in GSTR-1 was higher than the liability discharged through GSTR-3B.
Treating such difference as suppression of taxable turnover, the department issued a Show Cause Notice under Section 74 of the CGST Act alleging:
- Short payment of tax;
- Wilful suppression of facts; and
- Intent to evade payment of GST.
Consequently, tax, interest and equivalent penalty were demanded.
Contentions of the Appellant
The appellant contended that the mismatch was purely on account of reconciliation and timing differences and did not represent any suppression of turnover.
The differences had arisen due to:
1. Reporting and subsequent adjustment of advances;
2. Credit notes issued in subsequent tax periods;
3. Accounting treatment of debit notes;
4. Timing differences between GSTR-1 and GSTR-3B reporting; and
5. Technical and procedural challenges prevalent during the initial years of GST implementation.
It was further submitted that all transactions had been duly recorded in the books of account and there was no intention whatsoever to evade tax.
Issues Before the Tribunal
The GSTAT examined the following issues:
1. Whether a mere mismatch between GSTR-1 and GSTR-3B is sufficient to invoke Section 74 of the CGST Act?
2. Whether proceedings under Section 74 can be sustained in the absence of fraud, suppression or wilful misstatement?
3. Whether the First Appellate Authority can independently convert proceedings initiated under Section 74 into proceedings under Section 73?
Findings of the GSTAT
1. Mere mismatch is not conclusive evidence of tax evasion
The Tribunal categorically held that a mismatch between GSTR-1 and GSTR-3B, by itself, cannot establish tax evasion.
Before invoking Section 74, the department is required to:
- Conduct detailed verification;
- Examine books of account;
- Undertake proper reconciliation; and
- Consider explanations furnished by the taxpayer.
The Tribunal observed that differences in returns may arise for various legitimate reasons and cannot automatically be equated with suppression of facts.
2. Invocation of Section 74 requires existence of mens rea
The Tribunal reiterated that proceedings under Section 74 can be initiated only where the ingredients of fraud, wilful misstatement or suppression of facts with intent to evade tax are established.
In the present case, no material evidence had been produced by the department to establish such ingredients.
Accordingly, invocation of Section 74 was held to be unsustainable.
3. First Appellate Authority cannot itself convert Section 74 proceedings into Section 73 proceedings
The Tribunal further held that once allegations of fraud fail, the First Appellate Authority cannot itself redetermine the liability under Section 73.
Reference was made to Section 75(2) of the CGST Act, which envisages re-determination by the Proper Officer in accordance with law.
Decision of the Tribunal
The GSTAT set aside the impugned order to the extent it sustained demand under Section 74 and remanded the matter to the Proper Officer for fresh determination in accordance with Section 75(2) read with Section 73, wherever legally permissible.
Key Takeaways
The judgment lays down certain important principles:
| Issue | Principle laid down |
| GSTR-1 vs GSTR-3B mismatch | Mere mismatch does not automatically imply short payment of tax |
| Section 74 proceedings | Require positive evidence of fraud, suppression or wilful misstatement |
| Burden of proof | Lies upon the department |
| Reconciliation | Must be undertaken before raising demand |
| Appellate powers | FAA cannot itself convert Section 74 proceedings into Section 73 proceedings |
Author’s Remarks
The ruling is a welcome relief for taxpayers who continue to receive notices based merely on auto-generated return mismatches. The decision reinforces the settled legal principle that substantive allegations such as fraud or suppression cannot be presumed solely on the basis of numerical differences in GST returns.
As GST administration increasingly relies on data analytics and automated scrutiny, this judgment serves as an important reminder that technology-driven discrepancies must always be supported by proper verification and independent examination before invoking penal provisions under Section 74.
The decision is likely to become a frequently cited precedent in litigation involving return mismatches, particularly for the formative years of GST implementation.
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