What key arguments to include in reply to GST SCN under section 74 for denial

For ITC-denial SCNs under Section 74, the reply should address both jurisdiction (why Section 74 is wrongly invoked) and merits (why ITC is correctly claimed).

1. Wrongful invocation of Section 74

• Argue that Section 74 can be invoked only when there is fraud, wilful misstatement, or suppression with intent to evade tax; mere mismatch, third-party report, or supplier default falls under Section 73.
• Point out if the SCN is vague or contains only figures without clearly alleging and substantiating fraud/suppression, citing case law that such Section 74 notices are without jurisdiction and liable to be quashed.

2. No allegation or evidence of fraud on the recipient

• Emphasise that all purchases and ITC have been disclosed in returns and books; there is no non-declaration or concealment on your side, so “suppression” as per Explanation 2 to Section 74 is not attracted.
• Highlight the absence of any material showing collusion with the supplier or knowledge of the supplier’s wrongdoing; without mens rea, the extended period and Section 74 penalty are unjustified.

3. Bona fide purchaser – ITC cannot be denied for supplier’s default

• Rely on recent HC/Supreme Court jurisprudence reading down Section 16(2)(c): ITC cannot be denied to a bona fide purchaser who has valid tax invoices, received goods, and paid value plus GST to a registered supplier, merely because the supplier did not deposit tax or was later cancelled.
• Quote the principle that the purchaser cannot be asked to do the “impossible” of ensuring the supplier’s GSTR-3B filing and tax deposit, and that Section 16(2)(c) applies only to non-bona fide/collusive transactions.

4. Onus discharged by documentary evidence

• Acknowledge that the burden to prove ITC admissibility lies on the recipient, but show that you have discharged this by producing: invoices, GRN/stock records, e-way bills/transport documents, weighment slips, bank proof of payments, GSTR-2B/2A reflection, and books reconciliation.
• Distinguish adverse decisions (where ITC was denied) by showing that in those cases the dealer failed to prove physical movement/genuineness, whereas in your case complete evidence of movement and payment is on record.

5. Natural justice and SCN defects

• Argue that denial of ITC or imposition of Section 74 penalty without supplying relied-upon material and statements, and without offering cross-examination, violates principles of natural justice; vague SCNs with only figures have been struck down by courts.
• Request that any third-party statements or investigation reports relied upon be supplied and witnesses be offered for cross-examination; otherwise, the demand and penalty under Section 74 are unsustainable.

6. Proportionality, double taxation, and constitutional angle

• Submit that denying ITC to a bona fide recipient when tax has already been collected by the supplier results in double taxation and arbitrary shifting of incidence from the defaulting supplier to an innocent buyer, which courts have held to be unconstitutional and contrary to the GST scheme.
• Emphasise that the revenue’s remedy is against the defaulting supplier; punishing a compliant recipient through a Section 74 demand and 100% penalty is disproportionate and contrary to recent higher-court guidance protecting bona fide buyers.

These core grounds, supported by annexed documents and specific case citations, usually form a strong, structured reply to an SCN under Section 74 for ITC denial.