Mechanical Section 74 GST Notices Near Limitation Cannot Replace Proof of Fraud

Summary: A DRC-01A issued near the limitation deadline for FY 2022–23 does not by itself establish a valid GST demand under section 74. The provision applies where tax short-payment, erroneous refund or wrongful ITC is attributable to fraud, wilful misstatement or suppression of facts with intent to evade tax, and those ingredients must be supported by transaction-specific evidence. A supplier’s retrospective registration cancellation, non-genuine label or portal risk indicator may justify investigation, but does not automatically prove that the recipient’s purchases were fictitious or that ITC was wrongly claimed. Taxpayers should therefore preserve invoices, e-way bills, transport records, weighment slips, banking evidence, stock records and onward-sales linkage and should seek all relied-upon documents and transaction-wise computations. The article also distinguishes the functions of sections 16, 50, 67, 70, 73, 74, 74A, 122 and 155 and stresses that section 74A applies to FY 2024–25 onwards, not FY 2022–23. Form GST DRC-01A is only a pre-notice intimation under Rule 142(1A) and does not substitute the statutory show-cause notice. Limitation objections should be raised at the earliest stage, along with objections concerning jurisdiction, absence of evidence, personal hearing, cross-examination, interest computation and penalty. A demand issued merely because limitation is approaching remains vulnerable if its statutory and evidentiary foundations are absent.

When Limitation Drives Demand: Karnataka GST Enforcement, Mechanical Section 74 Notices and the Burden on Bona Fide Taxpayers

A DRC-01A issued at the end of September 2026 for FY 2022–23 reflects a larger enforcement pattern: departmental officers are racing against statutory limitation, often by invoking section 74 and alleging fraud without disclosing transaction-specific evidence. Such action is not justified merely because a supplier’s registration was cancelled, a vendor is labelled “non-genuine,” or ITC appears risky on the departmental portal.

For FY 2022–23, a notice under section 74 had to be issued at least six months before the outer time limit for passing the order. On the ordinary statutory computation, the section 74 SCN deadline for FY 2022–23 falls on 30 September 2026, while the order must be issued by 31 March 2029. This explains the sudden pressure in September 2026—but limitation cannot validate an otherwise defective notice.

The real issue: limitation, not genuine investigation

The enforcement machinery is presently under pressure because FY 2022–23 is approaching an important limitation date. For a normal, non-fraud case, the statutory route was section 73. Under the amended law applicable to FY 2022–23, a proper show-cause notice for non-fraud cases must be issued within 42 months from the due date of the annual return, and the order must ordinarily follow within 12 months, subject to a limited extension.

However, section 74 gives the department a much longer period. It applies where tax is alleged to have been unpaid, short paid, wrongly refunded, or ITC wrongly availed/utilised by reason of fraud, wilful misstatement or suppression of facts to evade tax. Under the old section 74 framework relevant to FY 2022–23:

Nature of case	Provision	Core condition	SCN deadline for FY 2022–23	Order deadline
Ordinary error / non-fraud ITC dispute	Section 73	No fraud, wilful misstatement or suppression alleged	30 September 2026	31 December 2027, subject to statutory provisions
Fraud / wilful misstatement / suppression case	Section 74	Department must prove fraud, wilful misstatement or suppression with intent to evade	30 September 2026	31 March 2029

The statutory requirement under section 74(2) is unambiguous: the notice under section 74(1) must be issued at least six months before the time limit for passing the order under section 74(10).

This deadline pressure has led to a troubling pattern. Officers issue DRC-01A, endorsements, inspection communications, notices under sections 67 and 70, and references to section 122, then collectively describe the case as one under section 74. But a bundle of statutory references does not create jurisdiction. The department must first identify the actual contravention, show the evidence, establish the tax consequence, and then invoke the correct provision.

A limitation deadline is not a licence for a pre-written demand.

Section 74 cannot be used as a default section

Section 74 is not an alternative provision available merely because the department has little time left. It is an exceptional demand provision requiring specific jurisdictional facts.

The essential question is not whether an ITC entry exists in GSTR-3B. The real question is:

Was the ITC wrongly availed or utilised because of fraud, wilful misstatement, or suppression of facts by the recipient, with intent to evade tax?

If the answer is not supported by evidence, section 74 cannot be mechanically invoked.

What the department must establish

A legally sustainable section 74 notice should identify, at the minimum:

The exact invoice or transaction disputed.

The tax period, supplier name, GSTIN, invoice number, invoice date and ITC amount.

The particular condition of section 16(2) alleged to be breached.

The evidence that goods were not received, if that is the allegation.

The evidence that consideration was not paid, if that is the allegation.

The material showing tax was not paid by the supplier, if reliance is placed on section 16(2)(c).

The material connecting the recipient to the supplier’s alleged fraud.

The specific false declaration, suppression or wilful misstatement by the recipient.

The basis for charging interest.

The statutory basis and computation of penalty.

The relied-upon documents, statements, portal extracts and investigation reports.

A notice that merely says “supplier is non-genuine,” “GST registration was cancelled,” “supplier is non-existent,” or “registration was cancelled prior to purchase” is not enough. It may justify investigation, but it does not prove that the recipient’s purchase was fictitious.

The Supreme Court has recently emphasised that the extended limitation under section 74 can operate only where the allegation actually concerns fraud, wilful misrepresentation or suppression of facts. In other words, the department cannot call an ordinary ITC dispute a fraud case merely to obtain the five-year limitation period.

Retrospective cancellation is not proof against the buyer

One of the most common allegations is that the supplier’s registration has been cancelled retrospectively and, therefore, the buyer’s purchase invoices are “null and void.”

That conclusion is legally weak unless the department proves much more.

A cancellation order concerns the supplier’s registration status. It does not automatically decide the factual question whether:

Goods were actually supplied.

Goods were physically received by the purchaser.

Payment was made by banking channel.

The invoice was issued in the course of real business.

Transport documents support movement of goods.

Goods entered stock and were later sold or used.

The buyer knew about any alleged supplier fraud.

The buyer colluded with the supplier.

The recipient made a false declaration or suppressed any fact.

In the case of scrap traders, plastic recyclers and similar businesses, documents such as purchase invoices, transport records, weighment slips, inward registers, stock registers, banking trail, sales linkage and GST returns become especially important. If these records support the transaction, the department cannot simply ignore them and rest its case upon a later cancellation of the seller’s registration.

The buyer does carry a burden under section 155 to substantiate the claim of ITC. But section 155 is not a weapon to reverse ITC by presumption. It requires the recipient to produce available transactional evidence. Once genuine supporting evidence is produced, the officer must examine it objectively and cannot shift the entire burden of supplier default onto the recipient without establishing collusion or non-receipt of goods.

Why multiple sections are being invoked

Taxpayers are increasingly receiving notices containing sections 16, 50, 67, 70, 74, 74A, 122 and 155 in one communication. Often, this is not a sign of a stronger case. It is a sign that the notice has not been legally structured.

Each provision has a separate role.

Provision	Legal purpose	Common departmental misuse
Section 16	Conditions and eligibility for ITC	Treating any supplier-side problem as automatic failure of every condition by the recipient
Section 50	Interest	Demanding interest without showing whether ITC was merely availed or actually utilised and without a proper working
Section 67	Inspection, search and seizure	Using inspection powers as though they automatically establish tax liability
Section 70	Power to summon persons and seek evidence	Treating a statement or non-production of records as conclusive proof of fraud
Section 73	Demand in non-fraud cases	Avoiding its shorter limitation by calling every matter a fraud case
Section 74	Demand involving fraud, wilful misstatement or suppression	Invoking it without pleading or proving the mandatory ingredients
Section 74A	New common demand provision for later years	Incorrectly invoking it for periods before FY 2024–25
Section 122	Penalty for specified offences	Mentioning penalty provisions without identifying the precise offence and evidence
Section 155	Burden of proof in ITC matters	Misreading it as allowing reversal solely upon suspicion or supplier default

The taxpayer should insist that the officer state clearly: Which section is invoked? Which exact clause is violated? Which facts support that violation? Which documents prove it?

A notice cannot be sustained merely because it contains a long list of statutory provisions.

The error of invoking section 74A for FY 2022–23

A serious defect arises where a DRC-01A concerning FY 2022–23 refers to initiation of proceedings under section 74A.

Section 74A was introduced for a different regime and applies to determination of tax relating to FY 2024–25 onwards. Section 74A (12) expressly provides that its provisions apply for determination of tax pertaining to FY 2024–25 and subsequent years. Therefore, its use for FY 2022–23 is plainly misplaced.

The following objections are available where the notice mixes up sections 74 and 74A:

The proceedings are based on an inapplicable statutory provision.

The officer has not identified the correct legal regime.

The reference indicates non-application of mind.

The taxpayer cannot be compelled to answer a demand framed under a provision that does not apply to the relevant financial year.

The department must clarify whether it proposes to proceed under section 73 or section 74 and must satisfy the statutory conditions of the chosen provision.

A DRC-01A cannot cure an invalid statutory foundation merely by later referring to a different section.

This defect becomes more serious where the same notice inconsistently refers to section 74, section 74(5), section 74(1), section 74A, section 67, section 70 and section 122 without a coherent legal basis.

DRC-01A is not a demand order

Form GST DRC-01A is a pre-notice intimation under Rule 142(1A). It gives the officer’s preliminary ascertainment and affords the taxpayer an opportunity to make voluntary payment or submit objections. It is not a final determination and cannot replace the statutory SCN under section 74(1).

The distinction is important:

Stage	Form / provision	Legal effect
Pre-notice ascertainment	DRC-01A under section 74(5) and Rule 142(1A)	Preliminary intimation; taxpayer may object or voluntarily pay
Formal notice	DRC-01 under section 74(1)	Statutory SCN requiring a detailed reply
Hearing	Section 75(4), where adverse decision is contemplated or hearing is requested	Mandatory opportunity of being heard
Adjudication	Section 74(9)	Reasoned order determining tax, interest and penalty
Summary of order	DRC-07	Electronic summary of demand order

Therefore, the taxpayer should never treat DRC-01A as a final demand or make payment merely because the officer says that section 74(1) notice will follow. Unless the taxpayer decides voluntarily to settle after verifying all facts, the proper course is to file a detailed objection, seek relied-upon documents, seek time, request personal hearing and preserve all legal objections.

The recurring procedural defects

In Karnataka enforcement proceedings, taxpayers frequently face notices with the following deficiencies:

No transaction-wise annexure.

Illegible annexures or totals that do not reconcile with the final demand.

No supplier cancellation order.

No material showing that cancellation took effect before the disputed transaction.

No proof that goods were not received.

No enquiry with transporters or purchasers of the taxpayer’s onward supplies.

No proof that payment was not made through banking channels.

No third-party statement supplied to the taxpayer.

No opportunity to cross-examine persons whose statements are relied upon.

No investigation report supplied.

No separate findings under section 16(2)(a), 16(2)(b), 16(2)(c), section 38 or Rule 36.

No proof of fraud, wilful misstatement or suppression by the taxpayer.

No invoice-wise interest calculation.

Mechanical levy of penalty.

Incorrect invocation of section 74A for pre-FY 2024–25 periods.

A demand raised at the end of the limitation period without meaningful opportunity to respond.

These defects are not technical objections. They go to the root of fair adjudication. A taxpayer cannot meet a case that has never been properly disclosed.

The limitation defence must be taken early

For FY 2022–23, the department may seek to issue a section 74(1) notice on or before 30 September 2026. But a DRC-01A is not necessarily equivalent to a statutory SCN under section 74(1). The department must issue a proper notice in the prescribed statutory form and within the limitation period.

The taxpayer must preserve the following objections in writing:

DRC-01A does not substitute a section 74(1) SCN.

An intimation under section 74(5) is not the formal notice contemplated under section 74(1).

The statutory deadline applies to the actual SCN.

The department must establish the date and manner of service of a legally valid notice under section 74(1), not merely the date of internal approval, generation of an incomplete DRC-01A, or dispatch of an endorsement.

Section 74 requires fraud-type allegations.

If the facts indicate only a supplier-side dispute, return mismatch, alleged non-payment by vendor or retrospective cancellation, the department cannot mechanically take the five-year route.

Non-fraud matters belong to section 73.

If the final finding does not establish fraud, wilful misstatement or suppression, the matter must be treated under the non-fraud provision and evaluated against the limitation applicable there.

A time-barred proceeding cannot be revived by changing labels.

Calling a notice “inspection proceeding,” “endorsement,” “pre-notice intimation,” “DRC-01A,” “verification memo” or “section 74A proceeding” cannot extend the statutory deadline applicable to a section 74(1) demand notice.

The CBIC has itself clarified in the context of re-determination that when proceedings under section 74 do not sustain fraud/suppression allegations and are treated as section 73 matters, the section 73 limitation must be respected; proceedings hit by limitation must be dropped. The principle is important: the department cannot obtain the benefit of section 74 limitation while ultimately failing to establish the special ingredients of section 74.

What taxpayers should do immediately

A taxpayer receiving such a communication should act promptly, particularly when the departmental deadline is near.

File a written reply to DRC-01A within the stated period.

Clearly state that no liability is admitted.

Challenge the application of section 74 where fraud, wilful misstatement and suppression are not specifically pleaded and proved.

Object specifically to any reference to section 74A for FY 2022–23.

Seek a complete copy of all relied-upon documents.

Seek invoice-wise and tax-head-wise computation.

Ask for supplier cancellation orders and the actual effective date of cancellation.

Ask for the investigation report, portal data and statements of third parties.

Demand an opportunity to cross-examine suppliers, transporters, brokers or other persons whose statements are relied upon.

Request a personal hearing in writing.

File transaction-wise evidence: invoices, payments, e-way bills, LR copies, weighment slips, inward register, stock record and outward sales linkage.

Insist that interest be computed in accordance with section 50 and not imposed as an arbitrary or flat amount.

Object to penalty unless the exact offence and statutory ingredients are proved.

Maintain proof of portal filing, email filing, physical filing and departmental acknowledgement.

A practical illustration

Assume a plastic scrap dealer bought material in December 2022 from a supplier whose GST registration was cancelled retrospectively in October 2022. The dealer has:

A tax invoice;

E-way bill;

Lorry receipt;

Weighment slip;

Bank payment;

Scrap inward register;

Stock record;

Subsequent sale invoice; and

GST return reflecting ITC.

In such a case, retrospective cancellation may create suspicion and may justify verification. But it does not establish that the buyer did not receive scrap, did not pay the supplier, knew of fraud, or falsely claimed ITC.

If the department wants to deny ITC, it must examine the documents and bring positive evidence that the transaction was a sham, that goods never moved, that documents were fabricated, that the taxpayer was part of an arrangement, or that statutory conditions under section 16(2) were demonstrably not met. A one-line conclusion—“supplier cancelled; ITC inadmissible”—cannot replace evidence.

Conclusion

The current rush to issue ITC demand notices for FY 2022–23 must not result in abandonment of statutory discipline. The department is entitled to investigate fake invoicing and protect revenue. At the same time, it must act within the four corners of the GST law.

Limitation cannot convert suspicion into proof.

A supplier’s cancellation cannot automatically destroy a purchaser’s ITC.

A list of sections cannot replace a legally valid notice.

Section 74 cannot be invoked without proving fraud, wilful misstatement or suppression by the taxpayer.

Section 74A cannot be used for FY 2022–23.

A demand issued in haste, without documents, without transaction-specific allegations, without proof of recipient involvement and without a clear legal foundation is vulnerable at the adjudication and appellate stage. The taxpayer must respond firmly, preserve limitation objections, produce genuine transactional evidence and insist on a fair, speaking and lawful adjudication.