Section 74 Cannot Be Invoked on Mere Suspicion: Allahabad High Court Reinforces Evidentiary Threshold for ITC Denial
The article discusses the decision of the Allahabad High Court in M/s Safecon Lifescience Pvt. Ltd. v. Additional Commissioner Grade-2 & Another, which was subsequently left undisturbed after the Supreme Court dismissed the Revenue’s Special Leave Petition. The dispute concerned proceedings under Section 74 of the UPGST Act, 2017 against a recipient who had availed Input Tax Credit (ITC) supported by tax invoices, e-Way Bills, transport documents, banking channel payments, GST returns, and documentary proof of movement of goods, while the Department relied primarily on intelligence reports regarding the supplier’s upstream transactions. The High Court observed that Section 74 is a penal provision requiring the statutory ingredients of fraud, wilful misstatement, or suppression of facts, and held that proceedings cannot be sustained merely because the supplier or upstream vendors are under suspicion where the Department fails to establish fraudulent conduct by the recipient. The Court further stated that intelligence reports without independent verification and corroborative evidence cannot be the sole basis for denying ITC or invoking penal proceedings. The article states that cancellation of a supplier’s GST registration, GSTR mismatches, adverse intelligence reports, and alleged upstream irregularities do not by themselves justify invocation of Section 74 or denial of ITC.
1. Introduction
The jurisprudence surrounding denial of Input Tax Credit (ITC) under the GST regime continues to evolve, particularly in cases where the recipient has undertaken bona fide transactions but the supplier is subsequently found to be non-compliant.
A recent decision of the Allahabad High Court in M/s Safecon Lifescience Pvt. Ltd. v. Additional Commissioner Grade-2 & Another, which was subsequently left undisturbed by the Supreme Court upon dismissal of the Revenue’s Special Leave Petition (SLP), reiterates a significant legal principle:
“Section 74 cannot be invoked merely on the basis of suspicion or intelligence inputs in the absence of evidence establishing fraud, wilful misstatement or suppression of facts.”
2. Background of the Dispute
The petitioner had availed ITC on purchases supported by comprehensive documentary evidence, including:
1. Tax invoices;
2. E-Way Bills;
3. Transport documents;
4. Payments through banking channels;
5. GST returns; and
6. Documentary proof evidencing the actual movement of goods.
Despite the existence of these contemporaneous records, proceedings under Section 74 of the UPGST Act, 2017 were initiated primarily on the basis of intelligence reports alleging irregularities in the supplier’s upstream transactions.
The Department questioned the genuineness of the ITC without recording any specific finding that the recipient had committed fraud, wilful misstatement or suppression of facts with an intention to evade tax.
3. Judicial Findings
The Allahabad High Court observed that Section 74 is a penal provision and, therefore, its invocation is conditional upon the existence of the statutory ingredients expressly prescribed therein.
The Court held that where a taxpayer has substantiated the genuineness of the transaction through cogent documentary evidence and the Department fails to establish any fraudulent conduct or deliberate suppression on the part of the recipient, proceedings under Section 74 cannot be sustained merely because the supplier or its upstream vendors are under suspicion.
The judgment further emphasized that intelligence reports, without independent verification and corroborative evidence, cannot form the sole basis for denying ITC or invoking penal proceedings.
Aggrieved by the High Court’s decision, the Revenue preferred a Special Leave Petition before the Supreme Court. However, the Apex Court declined to interfere and dismissed the SLP at the admission stage, thereby allowing the High Court’s ruling to attain finality.
4. Key Legal Principle Emerging from the Decision
The decision reinforces that the following circumstances, by themselves, do not automatically justify invocation of Section 74 or denial of ITC:
1. Cancellation of the supplier’s GST registration;
2. GSTR mismatches;
3. Adverse intelligence reports; and
4. Alleged irregularities in the supplier’s upstream supply chain.
Core Takeaway”Before resorting to Section 74, the Department must independently establish, through credible evidence, that the recipient has wrongfully availed ITC by reason of fraud, wilful misstatement or suppression of facts, as contemplated under the statute. Mere suspicion cannot substitute the evidentiary burden mandated by law”
5. Practical Implications for Taxpayers
The ruling offers significant guidance for genuine businesses that maintain robust compliance practices.
While taxpayers must continue to exercise commercial prudence in dealing with suppliers, the judgment underscores that documentary evidence remains the strongest defence against allegations of wrongful ITC availment.
