No Penalty Without Intent: High Court Reinforces Mens Rea Requirement in GST Section 74.
In practice, there are numerous genuine cases where bona fide purchasers have procured goods from registered suppliers, possessing valid tax invoices, e-way bills, and proof of payment through banking channels, yet the authorities invoke Section 74 mechanically. Disturbingly, even the appellate authorities often fail to intervene or extend relief in such genuine cases, resulting in undue hardship to honest taxpayers and defeating the very objective of ease of doing business under the GST regime.
It is pertinent to mention that, while it is correct that the initial burden of proof lies on the assessee to substantiate the genuineness of transactions and the validity of the Input Tax Credit (ITC) claimed, the onus subsequently shifts to the Revenue once it invokes the extended period of limitation under Section 74 of the GST Act. In such cases, the burden squarely rests on the department to establish the essential elements of Section 74—namely, the existence of fraud, willful misstatement, or suppression of facts with intent to evade tax. Without proving these elements through cogent evidence, mere procedural lapses or third-party defaults cannot justify the invocation of Section 74 or the denial of ITC.
It is pertinent to mention that mere omission to provide correct information does not amount to suppression of facts unless it is deliberate and intended to evade payment of duty. Suppression involves a deliberate failure to disclose complete information with the intent to avoid liability. Where the facts are known to both parties, an omission by one party to do what could have been done does not constitute suppression.
The Allahabad High Court, in the case of M/s Safecon Lifescience Pvt. Ltd. v. Additional Commissioner Grade-2 & Another, Writ Tax No. 389 of 2023 (decided on 9 September 2025), set aside the impugned orders dated 20.12.2022 passed by the Additional Commissioner, Grade-2 (Appeal)-II, State Tax, Agra, and 12.01.2022 passed by the Deputy Commissioner, Commercial Tax, Agra.
The Court held that proceedings under Section 74 can be initiated only when there is a clear finding of fraud, willful misstatement, or suppression of facts to evade tax. In this case, the authorities failed to record any such finding against the petitioner. The Court observed that the petitioner had produced all relevant evidence — including invoices, e-way bills, transport documents, bank payments, and GSTR filings — proving genuine purchases and actual tax payment. Despite this, the authorities denied ITC solely on unverified information from another department, without providing the material to the petitioner or conducting an independent verification.
Holding that such action violated the principles of natural justice and the CBIC Circular dated 13.12.2023, the High Court quashed the proceedings, emphasizing that Section 74 requires mens rea and cannot be invoked merely for procedural discrepancies or supplier default.
In paragraph 15 of the aforesaid judgment the Hon’ble Allahabad High Court emphatically observed that the GST regime was introduced by the Central Government to promote ease of doing business in the country. However, it lamented that revenue authorities have been acting contrary to this very objective, often misusing the provisions of Section 74 of the GST Act to harass bona fide taxpayers. The Court noted that recognizing such misuse, the Government issued a Circular dated 13.12.2023, which specifically clarifies that proceedings under Section 74 can be initiated only in cases involving fraud, willful misstatement, or suppression of facts with intent to evade tax, and not otherwise.
In paragraph 20 of the judgment, the Hon’ble High Court categorically held that the authorities had neither recorded any finding of fraud, willful misstatement, nor suppression of facts to evade payment of tax, and therefore, the initiation of proceedings under Section 74 of the Act was wholly unjustified.
To reinforce this conclusion, the Court relied upon the judgment of the Hon’ble Supreme Court in Continental Foundation Joint Venture Holding, Nathpa, H.P. vs. Commissioner of Central Excise, Chandigarh-I [(2007) 10 SCC 337], wherein the Apex Court elaborated on the meaning of the expressions “suppression” and “willful misstatement.” It was held that mere omission or inaccuracy does not amount to suppression unless it is deliberate and made with intent to evade payment of duty. The Supreme Court clarified that “suppression” involves an element of mens rea (guilty intent), and that misstatement or suppression must be willful, qualified by an intention to evade tax, as under-
“11. We are not really concerned with the other issues as according to us on the challenge to the extended period of limitation ground alone the appellants are bound to succeed. Section 11A of the Act postulates suppression and, therefore, involves in essence mens rea.
12. The expression ‘suppression” has been used in the proviso to Section 11A of the Act accompanied by very strong words as ‘fraud’ or “collusion” and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was deliberate to stop the payment of duty. Suppression means failure to disclose full information with the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what he might have done would not render it suppression. When the Revenue invokes the extended period of limitation under Section 11-A the burden is cast upon it to prove suppression of fact. An incorrect statement cannot be equated with a willful misstatement. The latter implies making of an incorrect statement with the knowledge that the statement was not correct.
13. Factual position goes to show the Revenue relied on the circular dated 23.5.1997 and dated 19.12.1997. The circular dated 6.1.1998 is the one on which appellant places reliance. Undisputedly, CEGAT in Continental Foundation Joint Venture case (supra) was held to be not correct in a subsequent larger Bench judgment. It is, therefore, clear that there was scope for entertaining doubt about the view to be taken. The Tribunal apparently has not considered these aspects correctly. Contrary to the factual position, the CEGAT has held that no plea was taken about there being no intention to evade payment of duty as the same was to be reimbursed by the buyer. In fact such a plea was clearly taken. The factual scenario clearly goes to show that there was scope for entertaining doubt, and taking a particular stand which rules out application of Section 11A of the Act.
14. As far as fraud and collusion are concerned, it is evident that the intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word ‘wilful’, preceding the words “mis-statement or suppression of facts” which means with intent to evade duty. The next set of words ‘contravention of any of the provisions of this Act or Rules’ are again qualified by the immediately following words ‘with intent to evade payment of duty.’ Therefore, there cannot be suppression or mis-statement of fact, which is not wilful and yet constitute a permissible ground for the purpose of the proviso to Section 11A. Mis-statement of fact must be wilful.
The Hon’ble High Court further observed that the Apex Court had clearly held that an incorrect statement, unless made knowingly and with the intention to deceive, cannot constitute a willful misstatement or suppression of facts. The Court emphasized that no adverse inference can be drawn when a taxpayer has disclosed all relevant information in good faith and without any intent to evade payment of tax. Thus, mere errors or omissions, in the absence of deliberate intent, do not justify the invocation of penal provisions such as Section 74 of the GST Act.
This ruling reinforces taxpayer protection against the arbitrary denial of ITC and the misuse of Section 74 of the GST Act. It aligns with a consistent line of judicial precedents, including Khurja Scrap Trading Co., Solvi Enterprises, and R.T. Infotech, which emphasize good faith, transparency, and procedural fairness in GST compliance. The judgment reiterates that Section 74 proceedings are intended only for cases involving fraud, willful misstatement, or suppression of facts with intent to evade tax, and not for routine mismatches or technical discrepancies.
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