Allahabad High Court on Invalid Section 74 GST Action for Lack of Fraud or Suppression Findings

Introduction

In Raghuvansh Agro Farms Ltd. Vs State of U.P. and 2 others, the Allahabad High Court examined the validity of proceedings initiated under Section 74 of the SGST Act against a registered assessee engaged in trading of agricultural commodities and areca nuts. The Court ultimately set aside the orders passed by the State GST authorities and the first appellate authority, holding that the very foundation for invoking Section 74 was absent, both on jurisdictional grounds and on merits.

The judgment reiterates a growing line of precedents from the Allahabad High Court that strictly confine the use of Section 74 to cases involving fraud, wilful misstatement or suppression of facts to evade tax, and not to routine mismatches or doubts about genuineness of transactions where statutory compliances are otherwise evidenced.

Factual Background

Business of the Petitioner

  • The petitioner, M/s Raghuvansh Agro Farms Ltd., is a private limited company having GSTIN No. 09AABCR8407N1ZW.
  • It is engaged in the supply of agricultural produce and areca nuts.
  • The assessee asserted that:
    • It maintains proper books of account.
    • It discharges its GST liabilities as and when due.

Survey and Initiation of Section 74 Proceedings

  • A survey was conducted at the premises on 22.1.2019.
  • On the basis of this survey, respondent no. 3 issued a show cause notice in Form GST DRC-01 dated 7.4.2021 under Section 74 of the SGST Act.
  • The assessee filed:
    • An initial reply on 7.5.2021.
    • Subsequently, a detailed reply with supporting documents in response to further notice dated 13.5.2022 (with reminder no. 3), filed on 17.6.2021.

Assessment Order and Appeal

  • Without affording a personal hearing, an order dated 31.5.2023 was passed by respondent no. 3 against the assessee under Section 74.
  • The assessee’s appeal was later rejected by respondent no. 2 by order dated **10.1.2025`.
  • Both these orders were challenged in the writ petition before the Allahabad High Court.

Key Grounds Raised by the Assessee

1. Jurisdictional Objection – Central vs State GST

The assessee argued that:

  • It falls within the Central GST jurisdiction, specifically under CGST Commissioner, Division III, Range XVI, and not under State GST.
  • No recommendation of the GST Council was placed on record authorising cross-empowerment for such proceedings under the UPGST Act.
  • The only cross-empowerment notification issued till date related to refunds under Section 54 of the UPGST/CGST Act, and no similar notification covered proceedings under Section 74.
  • Consequently, the proceedings initiated by the Deputy Commissioner, State Tax, Sector 10, NOIDA were asserted to be without jurisdiction.

2. Improper Invocation of Section 74 – No Allegation of Fraud or Suppression

On the core statutory requirement under Section 74, the assessee submitted that:

  • The show cause notice did not assert that ITC was wrongly availed or utilised due to:
    • Fraud,
    • Wilful misstatement, or
    • Suppression of facts to evade tax.
  • The notice and the assessment order did not articulate any specific intent on the part of the assessee to evade payment of tax or to wrongfully avail ITC.
  • Without alleging and proving these statutory elements, Section 74 itself could not be validly invoked, and the proceedings would be without jurisdiction.

3. Allegation of Circular Trading – Documentary Evidence Ignored

The department accused the assessee of circular trading and availing ITC without actual movement of goods. The assessee countered this by showing:

  • All purchases were backed by:
    • Tax invoices
    • E-way bills
    • Bilties
    • Banking channel payments
  • The transactions were duly recorded in:
    • Books of account
    • GSTR-1
    • GSTR-2A
    • GSTR-3B
  • Consequently, no adverse inference could be reasonably drawn when all statutory documents and returns were on record.

4. Specific Transactions with Named Suppliers/Customers

The assessee filed detailed materials regarding several counterparties:

(a) M/s Sadguru Traders, Meerut

  • The last purchase from M/s Sadguru Traders, Meerut was on 13.10.2018.
  • Although the survey at M/s Sadguru Traders’ premises allegedly led to a finding of non-existence and cancellation of registration, the assessee argued:
    • At the time of purchase, M/s Sadguru Traders was a registered dealer.
    • Conditions under Section 16 regarding availment of ITC were fulfilled.
    • Any subsequent action against the supplier could not automatically be used to deny ITC to the assessee.

(b) M/s Sibri Traders, Gurugram