Reconciliation Differences Are Not Fraud — A Welcome Beginning from the Thiruvananthapuram Bench
Summary: The GST Appellate Tribunal, Thiruvananthapuram Bench, in M/s. Santhome Latex Enterprises v. The Commissioner of CGST, Thiruvananthapuram, Final Order No. 04/TVP/KERALA/2026 | Dated 21.08.2026, examined the invocation of Section 74 of the CGST Act for an alleged excess ITC difference arising from return data. The Tribunal held that a mere transgression of ITC provisions cannot attract Section 74 unless the Department establishes fraud, willful misstatement or suppression of facts with intent to evade tax. It found the show cause notice unsupported by material evidence and criticised vague assertions that availment of excess or ineligible ITC itself constituted suppression. The Tribunal also held that the first appellate authority could not sustain the demand on a ground not raised in the SCN, as this violated natural justice. Referring to CBIC Instruction No. 05/2023-GST and Supreme Court decisions on suppression, the Tribunal set aside the Order-in-Appeal and allowed the appeal with consequential relief. The ruling emphasises evidence-based invocation of Section 74 and the importance of proper reconciliation and disclosure.
A Problem Every Practitioner Knows Too Well
Ask any GST practitioner about the most routine feature of departmental audits today, and the answer is likely to be the same: the Section 74 show cause notice issued as a matter of course. Section 74 of the CGST Act, 2017 was designed as an exceptional provision — reserved for cases of fraud, willful misstatement, or suppression of facts with intent to evade tax, carrying an extended limitation period and a harsh penalty. In practice, however, the section has become the default charging provision for audit paras.
The pattern is depressingly familiar. An audit throws up a difference between GSTR-2A / Table 8 figures and the ITC availed in GSTR-3B. Without any investigation into why the difference exists, and without a single finding on the taxpayer’s state of mind, the notice reproduces the statutory language: the taxpayer has “suppressed facts”, acted with “malafide intention to evade payment of tax”, and is therefore liable under Section 74(1) with penalty under Section 74(9). No reasons are given as to why the extended-period provision is invoked in preference to Section 73. Reconciliation differences — which are frequently the product of timing mismatches, supplier-side defaults, or bona fide classification positions — are treated, by default, as evidence of fraud.
Worse still, the taxpayer traditionally found no relief within the departmental hierarchy. Adjudicating authorities routinely confirmed such demands, and even where a courageous officer dropped a demand, the review and first-appeal machinery frequently restored it. Until now, meaningful relief usually meant a writ petition before the High Court — an expensive and uncertain remedy. The decision of the GST Appellate Tribunal, Thiruvananthapuram Bench, in M/s. Santhome Latex Enterprises marks a genuine turning point: the Tribunal has taken cognizance of this casual invocation of Section 74, and has said so in unusually direct language. It is a good beginning.
The Facts: A Textbook Example of the Malaise
M/s. Santhome Latex Enterprises, a manufacturer of centrifugal rubber latex, underwent a departmental audit for the period July 2017 to March 2022. The audit culminated in a show cause notice under Section 74(1) proposing recovery of alleged excess ITC of Rs. 8,56,877, with interest under Section 50 and penalty under Section 74(9) read with Section 122(2)(b).
The proceedings arose purely from statutory return data — GSTR-2A / Table 8 figures, GSTR-3B and GSTR-9C reconciliation records. There was no search, no seizure, no parallel records, no fake invoices, no concealed purchases. The invoice-wise reconciliation explaining the alleged difference had already been uploaded through the taxpayer’s GSTR-9C / annual return filings and was available on the common portal. Yet the SCN alleged, in bald terms, that the taxpayer had taken self-assessed ITC “without actually verifying the eligibility thereon” and that availment of ineligible or excess credit “would amount to suppression of facts” with malafide intent.
To his credit, the adjudicating authority — the Superintendent, Pattom Range — dropped the demand, recording that the taxpayer had filed self-certified reconciliation statements in GSTR-9C each year, had reversed ineligible/blocked credit on self-assessment, and that mere contravention of Section 16(2) or Section 42(1) could not be treated as fraud or suppression. The Revenue, however, carried the matter in appeal, and the Joint Commissioner (Appeals) reversed the adjudication order — not on the grounds in the SCN, but on an entirely new ground: that the taxpayer had failed to reply to the audit enquiry and Final Audit Report. So even where the adjudicating authority had granted relief, the first appellate authority took it away — on a charge the taxpayer was never called upon to answer.
The Tribunal Speaks: Vague and Bald Assertions Are Not Evidence
On an independent perusal of the SCN, the Tribunal found no evidence whatsoever supporting the suppression charge, and laid down the governing test:
“Every act of transgression of section 16(2) / 42(1) of the CGST Act cannot be termed as a violation inviting proceedings under section 74 of the CGST Act unless clear and categorical evidence has been adduced to the effect that the said transgression was the result of fraud, or willful-misstatement or suppression of facts with an intent to evade tax.”
The Bench held that the onus lies squarely on the Department to establish that the taxpayer knew a particular credit was not eligible but, in a contumacious act, still went ahead and took it. The entire SCN, it found, was founded on the “questionable assertion” that availment of ineligible/excess credit would by itself amount to suppression — supported by nothing more than “vague / bald assertions”.
On the first appellate order, the Tribunal was scathing. If the Department’s appeal left it “flummoxed”, the Order-in-Appeal, it confessed, “has done one better and left us totally dumbfounded”. The OIA did not specify what information was sought from the taxpayer, when it was called for, or under which statutory provision — it was, in the Tribunal’s memorable phrase, “delightfully vague”. Sustaining the demand on a ground never raised in the SCN violated the fundamental principles of natural justice and was fatal by itself. The Tribunal also found it strained credulity to suggest that non-reply to an audit enquiry could amount to suppression when the underlying data was already on the portal and Section 65 contemplates no statutory reply to a Final Audit Report.
The Board’s Own Instruction Binds the Field Formations
Significantly, the Tribunal anchored its analysis in CBIC Instruction No. 05/2023-GST dated 13.12.2023, which directs that Section 74(1) may be invoked only where the investigation indicates material evidence of fraud, willful misstatement or suppression to evade tax — and that such evidence must be made part of the show cause notice itself. The SCN in this case, issued after the Instruction, failed every test: it was “not based on any investigation worth the name”, and no material evidence of fraud or suppression was indicated. Field formations issuing template Section 74 notices are, in effect, acting contrary to the Board’s own binding directions.
The Tribunal further grounded its findings in the settled law of the Supreme Court under the analogous provisions of the Central Excise Act, 1944 — Cosmic Dye Chemical v. Collector of Central Excise, Bombay [1995 (75) E.L.T. 721 (S.C.)], holding that misstatement or suppression must be willful, with intent to evade; and Commissioner of C. Ex., Nagpur v. Ballarpur Industries Ltd. [2007 (215) E.L.T. 489 (S.C.)], holding that mere omission to give correct information is not suppression unless deliberate, and that when facts are known to both parties, omission by one party is not suppression.
The Holding
Answering both questions framed for decision in the negative, the Tribunal held that, in the absence of any other evidence to the contrary:
- The mere act of taking ineligible self-assessed ITC in the Electronic Credit Ledger would not amount to suppression of facts within the scope of Section 74(1) of the CGST Act; and
- Mere failure to reply to the audit enquiry / Final Audit Report would not amount to suppression of facts in terms of Section 74 of the CGST Act, 2017.
The Order-in-Appeal was set aside and the appeals allowed with consequential relief.
Why This Is a Good Beginning
The real significance of this ruling lies not merely in the relief granted to one taxpayer, but in what it signals institutionally. For years, taxpayers have argued — armed with High Court precedent and the Board’s own Instruction — that reconciliation differences cannot by default be branded as fraud, suppression or willful misstatement. Yet within the departmental hierarchy, up to and including the first appellate authority, this argument found little traction. Demands were confirmed mechanically; review orders were filed as a matter of routine; and appellate authorities, as this very case demonstrates, were willing to sustain demands even on grounds foreign to the notice.
The GSTAT has now begun functioning, and one of its early substantive orders confronts this malaise head-on. The Tribunal has appreciated the adjudicating authority’s courage in dropping an unsustainable demand — commending it for “separating the grain from the chaff” — while observing pointedly that it would have been heartened had the Revenue accepted that unbiased, legally sound order instead of filing an appeal that was “an exercise in futility”. This is the appellate discipline that has been missing in the GST adjudication ecosystem, and its arrival should moderate both the drafting of show cause notices and the mechanical filing of departmental appeals.
For taxpayers and practitioners, the practical roadmap is now clear:
- Demand reasons, not templates. A Section 74 notice must disclose the material evidence of fraud or willful suppression within the notice itself. A notice that merely recites the statutory language is vulnerable at the threshold — test it against CBIC Instruction No. 05/2023-GST.
- Reconciliation differences are explanations waiting to be made — not admissions of fraud. Where the difference arises from statutory return data already on the portal, the very foundation of a suppression charge is absent.
- Meticulous GSTR-9C disclosure is the strongest shield. Santhome Latex succeeded because its invoice-wise reconciliation was already on record through annual return filings.
- Watch for orders travelling beyond the SCN. Any demand sustained on a ground not found in the notice is open to challenge on natural justice grounds alone.
- Preserve the limitation argument. Once Section 74 fails, demands for earlier years may be barred by limitation if tested under Section 73 — a without-prejudice ground worth taking in every reply.
