Mere Availment of Ineligible ITC Is Not ‘Suppression’: GSTAT Sets Aside Section 74 Demand

Summary: The GST Appellate Tribunal, Kerala, held that mere availment of ineligible input tax credit (ITC) does not automatically constitute fraud, wilful misstatement or suppression of facts under Section 74 of the CGST Act, 2017. The dispute concerned ITC of ₹8,56,877 identified during a GST audit covering July 2017 to March 2022. Although the adjudicating authority dropped the Section 74 proceedings, the first appellate authority reversed that decision, relying on the taxpayer’s alleged failure to respond to audit enquiries. The Tribunal found that this allegation was absent from the original show cause notice and could not be introduced as a fresh ground in appeal. It further observed that the ITC reconciliation and supporting information were already available through statutory returns filed on the GST portal. Referring to CBIC Instruction No. 05/2023-GST and the requirement to establish fraud, wilful misstatement or suppression through evidence, the Tribunal set aside the Order-in-Appeal and allowed the taxpayer’s appeal with consequential relief. The ruling distinguishes ineligible ITC from deliberate tax evasion and reinforces that invocation of Section 74 requires evidence supporting its statutory ingredients.

Case at a Glance

Santhome Latex Enterprises Vs Commissioner of CGST (GSTAT Thiruvananthapuram); Appeal No. APL/21/TVP/2026; 21/08/2026

Case Issue

GST- Input Tax Credit- Section 74 of the CGST Act- Invocation of Section 74 merely on availment of ineligible ITC

• Whether mere availment of ineligible ITC on electronic credit ledger will invoke the provision of Section 74 of act.
• Whether the appellate authority could sustain Section 74 on a ground not taken in the show cause notice (non-reply to audit queries), and whether such non-reply by itself amounts to suppression.
• Whether contravention to Section 16(2) and section 42(1) of the act would amount to fraud under section 74 of the act.
• Whether uploading the reconciliation and reversing the excess credit during GSTR 9C filing on common GST portal would not reverse the invocation of suppression of facts / wilful misstatement under section 74 of the act.

Relevant Sections / Provisions Used in This Case

• Section 16 of the CGST Act, 2017
• Section 17 of the CGST Act, 2017
• Section 42 of the CGST Act, 2017
• Section 50 of the CGST Act, 2017
• Section 74 of the CGST Act, 2017
• Section 122 of the CGST Act, 2017
• Section 65 of the CGST Act, 2017
• Rule 88B of the CGST Rules, 2017

Brief Facts of the Case

→ The appellant has undergone a GST audit for the period July 2017 to March 2022. During the audit, the officer found an availment of ineligible input tax credit of INR 8,56,877/-. Based on the above finding, the officer has issued a show cause notice (SCN) under section 74 of the act together with interest under Section 50 and penalty under Section 74(9) read with Section 122(2)(b).

→ The difference was worked out entirely from return data – GSTR-2A / Table 8 figures compared with the ITC availed in GSTR-3B. There was no search, no seizure, no parallel records and no fake invoices. The SCN’s case for invoking Section 74 rested on one line: “Availment of ineligible/excess credit would amount to suppression of facts.”

→ The said SCN was then presented before the adjudicating officer (AO), the AO read the facts of the case presented by both the parties and has dropped the SCN. The AO noted that the taxpayer had availed ITC on the basis of supplier invoices, filed the GSTR-9C reconciliation every year (reconciling ITC in returns with the financial statements), uploaded the supporting documents on the portal, and reversed ineligible/blocked credit on a self-assessment basis. In his view, a mere contravention of Sections 16(2) and 42(1) cannot be treated as fraud, willful misstatement or suppression. Extract of the conclusion is pasted below:

“In view of the fact that “non-declaration of facts or information” as in explanation 2 to Section 74 is not established in the notice, though the notice is not eligible for the input tax credit in question, I am not inclined to confirm the proposal for demanding the amount under Section 74 of the GST Act or to impose penalty under Section 74. Confirming a demand under Section 74 also invokes the harsh penalty envisaged under this Section, which will be unjust in the given situation. The notice has not left an option to confirm the demand under Section 73 of the Act. Therefore, I drop the demand in the notice.”

→ The revenue officer, then filed an appeal before the joint commissioner (appeal) challenging the order passed by AO. The Joint commission, after reading the facts stated that the appellant is bound to provide all the necessary explanation and information asked by proper officer during the audit, failure of such information would amount to suppression of facts under the act and thereby reversed the order passed by AO and accepted the appeal filed by the proper officer. Extract of conclusion is pasted below:

“In view of the fact that “non-declaration of facts or information” as in explanation 2 to Section 74 is not established in the notice, though the notice is not eligible for the input tax credit in question, I am not inclined to confirm the proposal for demanding the amount under Section 74 of the GST Act or to impose penalty under Section 74. Confirming a demand under Section 74 also invokes the harsh penalty envisaged under this Section, which will be unjust in the given situation. The notice has not left an option to confirm the demand under Section 73 of the Act. Therefore, I drop the demand in the notice.”

→ Being aggrieved by the order passed by Joint commissioner, the appellant than challenged the order before the tribunal, the appellate tribunal, after reading the facts, finding and discussions of the case, has set aside the appeal order based on the below conclusion.

• Non-reply to the audit enquiry was never a ground in the SCN. Relying on it in appeal violated the principles of natural justice, and the Tribunal said the appeal ought to have been rejected on this ground alone. It also noted that the appeal order did not say what information was looked for, when it was looked for, or under which provision.
• The invoice-wise reconciliation of the alleged ITC difference was already part of the GSTR-9C / annual return filings available on the common portal. The Adjudicating Authority had relied on this, and the appellate authority reversed his order without even addressing that finding – which the Tribunal described as non-application of mind.
• Absent other evidence, a failure to reply to the audit enquiry or the final audit report does not amount to suppression under Section 74.
• mere availing of ineligible ITC does not amount to suppression of facts and wilful misrepresentation; the burden is on the Department to prove the wilful misstatement and suppression of facts.
• further, the CBIC instruction no. 05/2023-GST dated 13.12.2023, states that, Section 74 may be invoked only where the investigation shows material evidence of fraud, wilful misstatement or suppression to evade tax – and that evidence must form part of the SCN.
• Extract of the judgement is pasted below:

“In the absence of any other evidence to the contrary, the mere act of the taxpayer in taking ineligible self-assessed ITC in their Electronic Credit Ledger in terms of section 42(1) of the CGST Act would not amount to suppression of facts before the department, which would fall within the scope of section 74(1) of the CGST Act. In the absence of any other evidence to the contrary, mere failure to reply to the audit enquiry / final audit report by the taxpayer would not amount to suppression of facts in terms of section 74 of the CGST Act, 2017. 29. In view of the above, the impugned Order in Appeal is set aside and the appeals are allowed, with consequential relief.”

Case References

• → Cosmic Dye Chemical v. CCE, Bombay – 1995 (75) E.L.T. 721 (S.C.)
• → CCE, Nagpur v. Ballarpur Industries Ltd. – 2007 (215) E.L.T. 489 (S.C.)
• → CBIC Instruction No. 05/2023-GST dated 13.12.2023.

My Take

This is a welcome ruling, but it is important to read it correctly. The taxpayer won because Section 74 was wrongly invoked, not because the credit was found to be eligible – the AO had in fact recorded that it was not. So, the real lesson is not “ineligible ITC is safe”; it is that the Department cannot use the extended period and the heavier penalty under Section 74 without actual evidence of intent.

Key Takeaways

• → Always have a proper reconciliation of ITC recorded in books, availed in GSTR 3B and reflecting in GSTR2B/IMS.
• → Any mismatch with respect to above reconciliation found should be voluntarily reversed in GSTR returns (GSTR 3B/9C)
• → Any such reversal should be backed with proper reconciliation. While reversing any ITC during the filing of GSTR9C, the said reconciliation should be attached as attachment for officer’s reference.
• → A quick check with your tax advisor is cheaper than a five-year dispute.
• → The Tribunal protected the taxpayer here, but Explanation 2 to Section 74 does cover failure to give information asked for in writing. A short-written reply – even one pointing to data already on the portal – removes that risk.

How does your team manage ITC reconciliation and audit queries? I would be glad to hear your approach in the comments.

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Disclaimer: The views expressed are personal and based on the order as reported in (2026) 1 GSTAT E-Journal 122. This summary is for general information only and is not professional advice.