Accounts & Record under CGST ACT: Compliance, Evidence & Legal Consequences.

Summary: Accounts and records under the CGST Act, 2017 form the foundation for self-assessment, return filing, input tax credit, refunds and verification of tax liability. Sections 35 and 36, read with Rules 56, 57 and 58, prescribe requirements relating to maintenance, accessibility and retention of records, including stock, production, advances, tax liability, imports, exports, reverse-charge supplies and records maintained by transporters, warehouse operators, service providers, works contractors and agents. The Supreme Court in Bharti Airtel Ltd. emphasised that primary material for self-assessment consists of agreements, invoices, challans, receipts and books of account rather than information generated on the common portal. Proper records also have an important evidentiary role during scrutiny, audit, inspection, investigation and adjudication. Section 35(6) provides for determination of tax where goods or services are not properly accounted for, while Rule 56(6) addresses taxable goods stored at undeclared premises without valid supporting documents. The applicable demand procedure must nevertheless be followed under sections 73, 74 or 74A, as appropriate. Judicial decisions in Metenere Ltd. and Maa Mahamaya Alloys Pvt. Ltd. emphasise the requirement of following the prescribed tax-determination procedure. Failure to maintain or retain prescribed records may also attract penalties, while accurate accounts, reconciliations, supporting documents and preserved audit trails assist taxpayers in substantiating claims, explaining discrepancies and meeting applicable evidentiary burdens.

Introduction

1. The Central Goods and Services Tax (CGST) Act, 2017 introduced a technology-driven framework in which registered persons assess their tax liability under section 59. Accounts and records form the foundation of this process, supporting the determination of registration liability, computation and payment of tax, availment of input tax credit and claims for refund.

2. Their significance extends beyond routine compliance. In scrutiny, audit, inspection, investigation and adjudication proceedings, reliable records provide evidence to substantiate transactions, explain discrepancies and support the taxpayer’s claims. They also enable the proper officer to verify deductions, various claims and determine whether the statutory requirements have been fulfilled.

3. Sections 35 and 36 of the CGST Act, read with Rules 56, 57 and 58 of the CGST Rules, prescribe the principal requirements for maintaining, accessing and preserving accounts and records. Understanding these provisions is therefore essential both for effective compliance and for presenting a well-supported case in proceedings under the Act.

Purpose and Importance of Accounts and Records under the CGST Act.

4. Accounts and records provide the factual basis for determining and verifying a taxable person’s obligations under the CGST Act, 2017. They establish turnover, the nature of supplies and other circumstances relevant to registration, which must be examined with reference to the applicable thresholds, compulsory-registration provisions and exemptions.

5. The CGST Act defines “assessment” as the determination of tax liability and includes self-assessment, re-assessment, provisional assessment, summary assessment and best judgment assessment. Under section 59, every registered person must self-assess the tax payable and furnish returns for each tax period as specified under section 39. Accounts and record maintained u/s 35 form the basis for the self-assessment. Properly maintained accounts support this responsibility by enabling the taxpayer to trace the figures reported in returns to the underlying transactions, supporting documents and tax payments.

6. Accounts and records also form the basis of audit. The statutory definition of “audit” covers the examination of records, returns and other documents maintained or furnished under the GST law or any other law to verify the correctness of turnover declared, taxes paid, refunds claimed and input tax credit availed, and to assess compliance. Under section 65, the Commissioner or an officer authorised by him may undertake an audit of a registered person. During the audit, the registered person must provide the necessary facilities for verification of books and documents, furnish the information required and assist in its timely completion.

7. Beyond these compliance functions, records play an essential evidentiary role in proceedings. An explanation of tax paid is more readily verifiable when supported by invoice-wise reconciliations, ledger entries and payment details. Similarly, a refund or input tax credit claim can be substantiated by linking the amount claimed to the relevant transactions and supporting documents.

8. The principal purposes of maintaining accounts and records are therefore to establish registration liability, support self-assessment and return filing, substantiate tax payments and claims, respond to notices, and discharge applicable evidentiary burdens in assessment, refund, audit, inspection, demand and recovery proceedings. Reliable records enable taxpayers to explain their position and assist the proper officer in verifying Returns and in reaching a determination based on verifiable facts.

9. In the case of Bharti Airtel Ltd 2021-TIOL-251-SC-GST Apex Court has held that assessee cannot be fully/ wholly dependent on autogenerated information in electronic common platform; primary source of self-assessemnt is agreements, invoices/ challan, receipt of goods/ services and books of accounts maintained by assessee manually/ electronically. It is further observed in para 33 and 35 that

10.33 As per the scheme of the 2017 Act, it is noticed that registered person is obliged to do self-assessment of ITC, reckon its eligibility to ITC and of OTL including the balance amount lying in cash or credit ledger primarily on the basis of his office record and books of accounts required to be statutorily preserved and updated from time to time. That he could do even without the common electronic portal as was being done in the past till recently pre-GST regime. As regards liability to pay OTL, that is on the basis of the transactions effected during the relevant period giving rise to taxable event. The supply of goods and services becomes taxable in respect of which the registered person is obliged to maintain agreement, invoices/challans and books of accounts, which can be maintained manually/electronically. The common portal is only a facilitator to feed or retrieve such information and need not be the primary source for doing self-assessment. The primary source is in the form of agreements, invoices/challans, receipts of the goods and services and books of accounts which are maintained by the assessee manually/electronically. These are not within the control of the tax authorities. This was the arrangement even in the pre-GST regime whilst discharging the obligation under the concerned legislation(s). The position is no different in the post-GST regime, both in the matter of doing self-assessment and regarding dealing with eligibility to ITC and OTL. Indeed, that self-assessment and declarations would be any way subject to verification by the tax authorities. The role of tax authorities would come at the time of verification of the declarations and returns submitted/filed by the registered person.

11.5 As aforesaid, every assessee is under obligation to self-assess the eligible ITC under Section 16(1) and 16(2) and “credit the same in the electronic credit ledger” defined in Section 2(46) read with Section 49(2) of the 2017 Act. Only thereafter, Section 59 steps in, whereunder the registered person is obliged to self-assess the taxes payable under the Act and furnish a return for each tax period as specified under Section 39 of the Act. To put it differently, for submitting return under Section 59, it is the registered person who has to undertake necessary measures including of maintaining books of accounts for the relevant period either manually or electronically. On the basis of such primary material, self-assessment can be and ought to be done by the assessee about the eligibility and availing of ITC and of OTL, which is reflected in the periodical return to be filed under Section 59 of the Act.

Obligation to Maintain Accounts and Records under Section 35.

12. Section 35(1) of the CGST Act, 2017 requires every registered person to keep and maintain, at the principal place of business specified in the registration certificate, true and correct accounts of:

(a) production or manufacture of goods;

(b) inward and outward supplies of goods or services or both;

(c) stock of goods;

(d) input tax credit availed;

(e) output tax payable and paid; and

(f) such other particulars as may be prescribed.

13. The obligation extends beyond merely maintaining accounting entries. The records must accurately reflect the transactions and permit verification through the relevant supporting documents. A ledger balance without sufficient documentary support may not establish the correctness of a transaction or claim.

14. Where the registration certificate specifies more than one place of business, the first proviso to section 35(1) requires the accounts relating to each place to be maintained at that place. The second proviso permits accounts and other particulars to be maintained electronically in the prescribed manner.

15. These provisions must be read with Rules 56(15) and 56(16) of the CGST Rules. Rule 56(15) permits electronic maintenance of records and requires their authentication by digital signature. Rule 56(16) distinguishes between the requirements for manual and digital records: manual accounts and documents must be kept at every related place of business mentioned in the registration certificate, while digitally maintained accounts and documents must be accessible at every such place.

16. Accordingly, a centralised electronic accounting system must ensure access to the relevant records at each related business location. The accounts, together with supporting invoices, bills of supply, credit and debit notes, and delivery challans, must also be preserved for the period prescribed under section 36.

Period of Retention of Accounts and Records under Section 36

17. Section 36 of the CGST Act, 2017 requires every registered person obliged to maintain books of account and other records under section 35(1) to retain them for seventy-two months (six years) from the due date for furnishing the annual return for the relevant financial year. The retention period is calculated from that due date, rather than the actual date of filing the return or the date of the transaction.

18. An extended period applies where the registered person is a party to an appeal, revision or other proceedings before an Appellate Authority, Revisional Authority, Appellate Tribunal or court, whether initiated by the registered person or the Commissioner, or is under investigation for an offence under Chapter XIX. Records relating to the subject matter must be retained until one year after final disposal of the proceedings or investigation, or until the expiry of the ordinary seventy-two-month period, whichever is later.

19. Accordingly, records relating to an unresolved dispute or investigation must not be discarded merely because the ordinary retention period has expired. Their continued preservation ensures that the evidence remains available for verification and determination of the matter.

Accounts and Records of Transporters and Warehouse Operators.

20. Goods frequently remain in the custody of persons other than their owners during transportation and storage. Section 35(2) of the CGST Act therefore requires every transporter and every owner or operator of a warehouse, godown or other storage premises, whether registered or not, to maintain records of the consignor, consignee and other relevant particulars of the goods. The detailed requirements are prescribed under Rule 58:

21. Transporters: Under Rule 58(4)(a), transporters must maintain branch-wise records of goods transported, delivered and stored in transit, together with the GSTINs of registered consignors and consignees.

22. Warehouse and godown operators: Under Rule 58(4)(b), these operators must maintain accounts showing the period for which goods remain in storage and particulars of their receipt, dispatch, movement and disposal. Rule 58(5) further requires goods to be stored so that they can be identified item-wise and owner-wise, and requires operators to facilitate physical verification or inspection by the proper officer on demand.

23. Separately, Rule 56(17) requires carriers and clearing and forwarding agents holding goods for delivery or dispatch on behalf of a registered person to maintain true and correct records of the goods handled and produce their details when required by the proper officer.

24. These records establish the ownership, movement and custody of goods. They help taxpayers reconcile goods held by third parties with their own accounts and enable the proper officer to verify whether those goods have been properly accounted for.

Additional Accounts and Documents for Notified Classes under Section 35(3).

25. Section 35(3) of the CGST Act, 2017 empowers the Commissioner to notify a class of taxable persons required to maintain additional accounts or documents for the purposes specified in the notification. These requirements supplement the general recordkeeping obligations under section 35(1) and the applicable Rules.

26. The provision enables additional documentation to be prescribed for a specified class where necessary for verification of transactions and compliance. Its application depends on the relevant notification, which must be examined to identify the persons covered, the additional records required and the specified purpose.

Relaxation in the Manner of Maintaining Accounts under Section 35(4).

27. Section 35(4) of the CGST Act, 2017 empowers the Commissioner, where a class of taxable persons is unable to maintain accounts in accordance with section 35, to permit that class to maintain accounts in such manner as may be prescribed. The Commissioner must record the reasons for granting such permission in writing.

28. The provision allows flexibility in the manner of maintaining accounts; it does not grant a blanket exemption from recordkeeping. The relaxation is not automatic, and a taxable person claiming its benefit must fall within the class covered by the applicable permission and comply with the prescribed requirements.

Records of Imports Exports and Reverse Charge Supplies under Rule 56(1).

29. Rule 56(1) of the CGST Rules requires every registered person to maintain, in addition to the particulars specified under section 35(1), true and correct accounts of goods or services imported or exported and supplies attracting tax under reverse charge. These accounts must be supported by relevant documents, including invoices, bills of supply, delivery challans, credit notes, debit notes, receipt vouchers, payment vouchers and refund vouchers.

30. For imports of goods, the records should link the purchase and receipt of goods with the corresponding Bills of Entry, tax payments and input tax credit claimed. For exports, the supporting records may include Shipping Bills, a Letter of Undertaking or bond, and bank realisation certificates or foreign inward remittance certificates, as applicable to the transaction and the conditions governing zero-rated treatment or refund. These documents are not uniformly required for every import or export transaction.

31. For supplies attracting reverse charge, the accounts should identify the nature and value of the supply, the basis of liability, the tax discharged and any input tax credit subsequently claimed, subject to the applicable conditions.

32. Together, these records should enable each transaction to be traced from its supporting documents to the accounting entries and relevant returns. This facilitates verification of tax liability, input tax credit, zero-rated supplies and refund claims.

Maintenance and Significance of Stock Accounts under Rule 56(2).

33. Rule 56(2) of the CGST Rules requires every registered person, other than a person paying tax under section 10, to maintain accounts of goods received and supplied. These accounts must show opening balances, receipts, supplies and closing balances, including particulars of raw materials, finished goods, scrap and wastage. They must also record goods lost, stolen, destroyed, written off or disposed of as gifts or free samples. This enable to Proper officer to identify blocked credit u/s 17(5)(h).

34. A properly maintained stock register enables the taxable person to reconcile purchases, production, supplies and other stock movements with the quantities physically available. It help to prove the receipt of goods and comply with conditions prescribed u/s 16(2) (b) to avail ITC. It helps identify recording errors, explain shortages or excesses and substantiate the treatment of goods held in storage or transit. For the proper officer, it provides a basis for verifying the completeness of recorded transactions and examining discrepancies during audit, inspection or assessment.

35. A difference between physical stock and book stock requires examination of its cause before determining the tax consequences. It may arise from an omitted entry, a timing difference, an incorrect unit of measurement, goods in transit, a documented loss or an unrecorded supply. The taxpayer should support the explanation with relevant contemporaneous records, such as invoices, delivery challans, transport documents, physical verification reports and loss or destruction records.

36. For example, a shortage arising from goods destroyed in an accident should be supported by evidence of the incident, the quantity affected and the corresponding accounting entries. The input tax credit implications under section 17(5)(h) must also be examined. Proper documentation helps distinguish such destruction from an unexplained shortage and enables the tax treatment to be determined on the facts of the case.

Maintenance and Significance of Production Accounts under Rule 56(12).

37. Rule 56(12) of the CGST Rules requires every registered person manufacturing good to maintain monthly production accounts showing quantitative details of raw materials or services used in manufacture and the goods manufactured, including waste and by-products.

38. These accounts enable the manufacturer to reconcile input consumption with production, stock movements and supplies. They also help explain variations in output arising from changes in product mix, manufacturing processes, quality requirements or process losses. Supporting records, such as material issue slips, batch records and wastage reports, strengthen the explanation of such variations.

39. For the proper officer, production accounts provide a basis for verifying whether the recorded output is consistent with material consumption and other evidence of manufacturing activity. For the taxpayer, they help substantiate the completeness of recorded production and respond to allegations of suppressed manufacture or unaccounted supplies. Any discrepancy should be examined in light of the actual production process and supporting evidence before its tax consequences are determined.

40. Section 122A concerns a separate compliance obligation. It provides for penalties where a manufacturer covered by a special procedure notified under section 148 fails to comply with its machine-registration requirements. Its application depends on the notified procedure and the contravention involved; it is not a general penalty for deficiencies in production accounts under Rule 56(12).

41. Where such a special procedure applies, maintaining consistency between machine-registration particulars, production accounts and other prescribed records facilitates verification of manufacturing activity.

Maintenance and Purpose of Accounts of Advances under Rule 56(3)

42. Rule 56(3) of the CGST Rules requires every registered person to maintain a separate account of advances received, advances paid and the adjustments made against them.

43. These accounts enable advances to be linked with the relevant transactions and subsequently reconciled with invoices, payments or refunds. They help identify unadjusted balances and prevent the omission or duplication of amounts when determining tax liability.

44. The records also support the application of the time-of-supply provisions under sections 12 and 13, read with the applicable notifications. In particular, advances received for taxable services may trigger tax liability before an invoice is issued. The obligation to record an advance must, however, be distinguished from the obligation to pay tax on it, which depends on the applicable legal provisions.

45. For the taxable person, a properly maintained advance account supports timely payment of tax and correct adjustment when the supply is invoiced or the advance is refunded. For the proper officer, it facilitates verification of the timing and completeness of tax payments and the treatment of outstanding advances.

Maintenance and Purpose of Tax Liability Records under Rule 56(4).

46. Rule 56(4) of the CGST Rules requires every registered person, other than a person paying tax under section 10, to maintain accounts of tax payable, including liability under reverse charge, tax collected and paid, input tax and input tax credit claimed. It also requires a register of tax invoices, credit notes, debit notes and delivery challans issued or received during a tax period.

47. These records enable the taxable person to reconcile the books of account with returns and electronic ledgers, supporting accurate reporting and payment of tax. Each difference should be explained by reference to the relevant transaction or adjustment, such as a credit note, a timing difference or a reverse-charge liability, and its resolution should be documented.

48. For the proper officer, these accounts facilitate verification of tax liability, payments and input tax credit claims. For the taxpayer, they provide supporting evidence to explain discrepancies and respond to queries arising during scrutiny, audit or adjudication.

Particulars of Suppliers, Recipients and Storage Premises under Rule 56(5).

49. Rule 56(5) of the CGST Rules requires every registered person to maintain the following particulars:

50. (a) names and complete addresses of suppliers from whom goods or services chargeable to tax under the Act have been received;

(b) names and complete addresses of recipients to whom goods or services have been supplied, where required under the provisions of the Chapter; and

(c) complete addresses of premises where goods are stored, including storage during transit, together with particulars of the stock held at those premises.

51. These records identify the parties to transactions and establish the location of goods. They are particularly useful where goods are delivered to third parties, stored temporarily or held at a transporter’s premises.

52. For the taxable person, accurate particulars help link invoices and stock entries with the relevant suppliers, recipients and storage locations. They support reconciliation of goods held across different premises and provide evidence to explain their ownership, movement and custody during departmental proceedings.

53. For the proper officer, these particulars facilitate verification of transactions and physical stock, including goods held by third parties. Maintaining current and consistent details across these records, invoices and transport documents helps resolve discrepancies and enables effective verification

Specific Records for Service Providers Works Contractors and Agents.

54. The CGST Rules prescribe records suited to the nature of different business activities. These requirements help connect accounting entries with the services performed, contracts executed or transactions undertaken on behalf of a principal.

Service providers under Rule 56(13)

55. Every registered person supplying services must maintain accounts showing quantitative details of goods used in providing services, details of input services utilised and services supplied. Depending on the nature of the business, agreements, completion reports and customer confirmations may support these accounts. Such records help the taxpayer substantiate the services supplied and related inputs, while enabling the proper officer to verify the recorded transactions.

Works contractors under Rule 56(14).

56. Every registered person executing works contracts must maintain separate accounts for each works contract, showing the customer’s name and address; the description, value and quantity, wherever applicable, of goods or services received and utilised; payments received; and suppliers’ names and addresses.

57. Contract-wise accounts help allocate receipts and expenditure to the correct project and reconcile execution, billing and payments. They assist the taxpayer in explaining differences and enable the proper officer to examine each contract without mixing transactions relating to other projects.

Agents under Rule 56(11).

58. Every agent referred to in section 2(5) must maintain principal-wise records of authorisations to receive or supply goods or services, particulars of receipts and supplies, accounts furnished to each principal, and tax paid on the relevant transactions. The particulars must include descriptions, values and quantities, wherever applicable.

59. These records establish the scope of the agent’s authority and identify transactions undertaken for each principal. They help reconcile the agent’s records with those of the principal and facilitate verification of the corresponding supplies and tax payments.

Presumption Regarding Maintenance of Records under Rule 56(10)

60. Rule 56(10) of the CGST Rules provides that, unless proved otherwise, documents, registers or books of account belonging to a registered person and found at premises other than those mentioned in the registration certificate shall be presumed to be maintained by that registered person.

61. The presumption concerns the maintenance of records belonging to the registered person. It does not automatically attribute ownership of every document found at another premises to that person, nor does it conclusively establish tax evasion.

62. The presumption is rebuttable through relevant evidence explaining the nature, custody and maintenance of the records. Where ownership itself is disputed, that question must also be examined on the evidence. Accordingly, the provision should not be described as shifting the entire burden of proof in the proceedings to the taxpayer.

Obligation to Produce Books of Account under Rule 56(18).

63. Rule 56(18) of the CGST Rules requires every registered person, on demand, to produce the books of account required to be maintained under any law for the time being in force. The obligation therefore extends beyond books maintained specifically under the GST law.

64. Production of these books enables verification of transactions, tax liability and claims during departmental proceedings. For the registered person, timely production supports explanations and helps resolve discrepancies. Where records are maintained electronically, their production and authentication are also governed by Rule 57. Failure to produce information and records demanded by proper officer may constitute as suppression for the purpose of section 74 or 74A.

65. Failure to comply with a lawful demand may attract consequences under the applicable provisions of the Act. Any such action must take account of the nature of the default, the circumstances and the relevant statutory requirements.

Correction of Entries and Preservation of Audit Trails under Rule 56(8).

66. Rule 56(8) of the CGST Rules prohibits erasing, effacing or overwriting entries in registers, accounts and documents. Incorrect entries, other than those of a clerical nature, must be scored out under attestation, after which the correct entry must be recorded. Where registers and other documents are maintained electronically, a log of every entry edited or deleted must be preserved.

67. The provision permits correction while preserving the history of the record. The exception concerning clerical errors does not authorise erasure, effacement or overwriting.

68. For the taxable person, a transparent correction process helps explain discrepancies and substantiate the reliability of the accounts. For the proper officer, the original entry, attested correction or electronic log enables verification of the changes and their effect on reported transactions and tax liability.

69. Properly documented corrections therefore preserve the evidentiary value of records and help distinguish legitimate rectification from concealment or manipulation

Tax Treatment of Goods Stored at Undeclared Premises.

70. Rule 56(6) of the CGST Rules provides that where taxable goods are found stored at premises other than those declared under Rule 56(5), without valid supporting documents, the proper officer shall determine the tax payable as if those goods had been supplied by the registered person.

71. The provision requires consideration of both the undeclared storage location and the absence of valid documents. Mere failure to declare a storage premises should not, by itself, be equated with an unaccounted supply where the goods are duly recorded and supported by valid documents. Any separate contravention concerning declaration of the premises must be examined on its own merits.

Applicable provisions for determination of tax

72. Where the registered person has failed to account for the goods in accordance with section 35(1), section 35(6) provides the statutory basis for determining tax as if those goods had been supplied. Subject to section 17(5)(h), it expressly applies the demand provisions of section 73, section 74 or section 74A, with the necessary modifications. Rule 56(6) must therefore be read with this statutory framework. The applicable demand provision depends on the period to which the liability relates:

Quantification and procedural safeguards

73. The proper officer must establish the quantity and nature of the unaccounted goods, determine their taxable value under section 15 read with the applicable valuation rules, and apply the appropriate classification and tax rate. The notice should explain the relevant tax period, evidence and calculation, together with the basis for any interest and penalty proposed.

74. The taxpayer must have an opportunity to produce invoices, stock accounts, delivery challans, transport records and other evidence explaining the goods. Determination must follow the applicable notice and adjudication procedure, including the safeguards under section 75 concerning hearing, a reasoned order and the limits of the demand stated in the notice. Discovery of goods at an undeclared premises does not dispense with these requirements.

Determination of Tax on Unaccounted Goods or Services under Section 35(6)

75. Section 35(6) of the CGST Act provides that where a registered person fails to account for goods or services or both in accordance with section 35(1), the proper officer shall determine the tax payable as if those goods or services had been supplied by that person. This provision is subject to section 17(5)(h), which concerns restrictions on input tax credit relating to goods lost, stolen, destroyed, written off or disposed of as gifts or free samples.

76. The provision creates a statutory basis for taxing unaccounted goods or services as deemed supplies. However, the liability must be established and quantified through the prescribed proceedings; a discrepancy in accounts does not dispense with the requirement for lawful adjudication.

Procedure for determining liability.

77. Section 35(6) expressly applies section 73, section 74 or section 74A, as appropriate, with the necessary modifications. For periods up to financial year 2023–24, section 73 applies to non-fraud cases, while section 74 applies where fraud, wilful misstatement or suppression of facts to evade tax is established. For financial year 2024–25 onward, section 74A governs determination, with different penalty consequences according to the circumstances.

78. The proper officer must identify the unaccounted goods or services, establish the relevant tax period, determine the taxable value under section 15 and the applicable valuation rules, and apply the appropriate tax rate. The notice must disclose the factual and legal basis of the proposed demand. The taxpayer’s explanation and supporting evidence must be considered before a reasoned order is passed, subject to the safeguards in section 75.

Importance of accounts and supporting evidence.

79. For the taxable person, stock registers, production accounts, invoices, credit and debit notes, delivery challans and reconciliations help demonstrate that goods or services have been properly accounted for. These records can explain apparent discrepancies arising from goods in transit, third-party goods held in custody, timing differences, recording errors or documented losses.

80. For the proper officer, the same records provide a basis for distinguishing an explainable difference from an unaccounted transaction and for determining the quantity, value and tax treatment involved. A demand should address the discrepancy actually established after examining the evidence.

81. Where failure to account is established, the consequences may include tax on the deemed supply, applicable interest and penalties under the relevant provisions. Confiscation requires examination of the separate statutory conditions governing it.

82. Relevant judicial decisions.

83. In M/s Metenere Ltd. v. Union of India and Another, Writ Tax No. 360 of 2020, decided on 17 December 2020, the Allahabad High Court held that although section 35(6) treats unaccounted goods as deemed supplies, determination and quantification of tax must follow sections 73 or 74, including the required show-cause procedure. On the facts before it, the Court set aside the confiscation and the penalty exceeding ₹10,000 because the necessary tax-quantification exercise had not been undertaken and the grounds for confiscation were not established. The penalty conclusion was specific to the violations and facts examined; it should not be read as a universal ceiling for every case involving unaccounted goods.

84. In M/s Maa Mahamaya Alloys Pvt. Ltd. v. State of U.P. and Others, Writ Tax No. 31 of 2021, decided on 23 March 2023, the Allahabad High Court followed Metenere. It held that the exercise of assessing tax and imposing penalty through section 130, in the circumstances before it, was unsustainable and that the prescribed tax-determination procedure under sections 73 or 74 had to be followed. The Court also examined whether the particular conditions for invoking section 130 were established.

85. Both decisions concern the law before the introduction of section 74A. Their relevance lies in the requirement to establish liability through the proper statutory procedure. For financial year 2024–25 onward, that discussion must be read alongside the express inclusion of section 74A in section 35(6)

Penalties for Failure to Maintain or Retain Accounts and Records

86. Section 122(1)(xvi) of the CGST Act specifically addresses failure by a taxable person to keep, maintain or retain books of account and other documents required under the Act or Rules. The penalty prescribed under section 122(1) is ₹10,000 or the applicable amount specified in that subsection, whichever is higher. Depending on the contravention, the latter may relate to tax evaded, specified defaults in tax deduction or collection, irregular input tax credit or a fraudulent refund.

87. A higher penalty must be supported by the relevant facts and a legally sustainable determination of the amount involved. Failure to maintain records does not, by itself, establish that the tax attributable to the entire stock or turnover has been evaded.

88. Section 125 provides a residual penalty of up to ₹25,000 for contraventions for which no separate penalty is prescribed. Accordingly, where the established default is specifically covered by section 122(1)(xvi), section 125 should not be invoked as an additional general penalty for the same recordkeeping failure. The amount under section 125 is a statutory maximum, not an automatic levy.

Application and consequences.

89. Failure to maintain accounts, failure to preserve them for the required period, inability to provide access at the relevant business premises and concealment of transactions are distinct factual situations. The proper officer must identify the precise contravention, examine the taxpayer’s explanation and apply the appropriate provision.

90. Where deficient records also disclose unaccounted supplies or unsupported claims, tax, interest or other consequences may arise under the relevant provisions. However, tax demands, denial of input tax credit, confiscation and prosecution each require satisfaction of their respective statutory conditions. The restriction on duplicate penalties under section 75(13) must also be considered where a penalty has been imposed under section 73, 74 or 74A for the same act or omission.

91. Properly maintained and preserved records help the taxable person substantiate compliance and distinguish an explainable discrepancy from an unaccounted transaction. For the proper officer, they provide the evidence needed to determine the nature and extent of any default and impose consequences on a reasoned basis.

Evidentiary Role of Accounts and Records in GST Proceedings.

92. Accounts and records provide the factual support for declarations, explanations and claims made in GST proceedings. Their evidentiary value depends on their accuracy, completeness and connection with the transactions under examination.

93. During scrutiny, reconciliations help explain differences between returns, books of account and other available information. In an audit, supporting documents enable verification of turnover, exemptions, tax rates, input tax credit and refunds. During investigation or adjudication, contemporaneous records help establish the movement of goods, the identity of the parties and the circumstances surrounding disputed transactions.

94. Input tax credit requires particular attention because section 155 places the burden of proving eligibility on the person claiming it. Accounting entries and invoices should therefore be supported, where relevant, by evidence of receipt of goods or services, business use, payment and fulfilment of the other applicable statutory conditions. Recording a purchase in the books does not, by itself, establish entitlement to credit.

95. For the taxpayer, an effective response should connect each disputed issue with the relevant entries, supporting documents and reconciliation. For the proper officer, these records provide a basis for evaluating the explanation and reaching a reasoned determination. Their value lies in demonstrating how the underlying transactions support the tax treatment adopted

Benefits of Correct and Complete Accounts and Detection of Discrepancies.

96. Correct and complete accounts enable the taxpayer to make correct self-assessment u/s 59 and to present a consistent and verifiable explanation of business transactions during GST proceedings. By linking invoices, stock movements, receipts, payments and returns, they help establish the factual basis of the tax treatment adopted.

Benefits to the taxpayer.

97. Reliable accounts assist the taxpayer in substantiating turnover, tax payments, input tax credit, exemptions and refund claims, subject to fulfilment of the applicable legal conditions. They also help explain differences arising from timing, credit notes, advances, goods in transit or accounting corrections.

98. For example, a difference between turnover in the financial statements and GST returns may be explained through a reconciliation identifying the relevant transactions and their reporting periods. Similarly, delivery challans and third-party stock confirmations may establish why goods recorded in the books were not physically available at the taxpayer’s premises during inspection.

99. Accessible and properly organised records enable timely, issue-wise replies to notices and reduce the need to reconstruct transactions after a dispute arises. They can help narrow the issues requiring adjudication, challenge unsupported assumptions and reduce the time and cost of proceedings. A preserved audit trail may also support an explanation that a discrepancy resulted from an identifiable error, although the legal consequences depend on the facts and applicable provisions.

Use of discrepancies by the proper officer.

100. Incorrect or incomplete accounts can reveal discrepancies, inconsistencies that warrant further verification. By comparing the books with returns, invoices, bank records, stock statements, transport documents and information from counterparties, the proper officer may identify: outward supplies recorded in sales accounts but omitted from returns; unexplained stock shortages, excesses or differences between material consumption and production; input tax credit claims unsupported by evidence of receipt or other statutory requirements; transactions attracting reverse charge for which tax has not been discharged; credit notes or adjustments that reduce liability without adequate support; and unexplained receipts or altered entries requiring examination of the underlying transactions.

101. These discrepancies provide leads for inquiry rather than conclusive proof of tax evasion. For example, a bank receipt may represent a loan, capital contribution or transfer between accounts, while a stock difference may arise from goods in transit or a recording error. The taxpayer’s explanation and supporting evidence must therefore be examined before drawing an adverse conclusion.

102. The practical benefit of reliable accounts is that they make genuine transactions and errors easier to distinguish. Where records are deficient, the proper officer must establish the relevant facts, quantify any short payment through the prescribed proceedings and support any allegation of evasion with the evidence required by law.

Conclusion.

103. Maintaining correct, complete and accessible accounts and records is a fundamental obligation under the CGST Act and an essential safeguard for taxpayers in departmental proceedings. Supported by relevant documents, regular reconciliations and preserved audit trails, these records substantiate declarations and claims, explain discrepancies and discharge applicable evidentiary burdens. They also enable the proper officer to verify compliance and identify wrong availemnt of ITC, short payment or evasion. While section 35(6) and Rule 56(6) provide for tax determination in the circumstances specified therein, deficiencies in records must be examined in their factual context, and any demand must follow the prescribed proceedings under section 73, 74 or 74A, as applicable. The judicial decisions discussed reinforce the need for evidence and due process. Reliable recordkeeping thus supports fair tax administration, protects legitimate claims and reduces avoidable disputes.

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Motiram Kanadje | Retired Joint Commissioner of State Tax | Pune | Author can be reached via email E-mail [email protected]

Disclaimer: Nothing contained in this document is to be construed as legal opinion or view of author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. The author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this article nor for any action taken in reliance thereon.