Delhi HC Clarifies Section 74 ITC Demands Where Suppliers’ GSTINs Are Cancelled Retrospectively

1. Overview of the Delhi High Court ruling

In Treco Wire India Private Limited v. Additional Commissioner Central Tax Delhi North & Ors. [W.P.(C) 583/2026 dated September 29, 2026], the Hon’ble Delhi High Court examined the validity of a demand raised under Section 74 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) against an assessee on the basis of retrospective cancellation of its suppliers’ GST registrations.

The Court:

  • Set aside the Order-in-Original No. 45/ADC/D.N./Bhavan Meena/2024 dated January 15, 2024, which had confirmed an ITC demand of Rs. 3,34,21,261/- with interest and an equal penalty under Section 74.
  • Held that a Section 74 order must clearly spell out:
    • The specific suppliers and their GSTINs,
    • The invoices and periods involved,
    • The dates from which registrations were cancelled, and
    • The ITC linked to each such supplier.
  • Emphasised that the order must record concrete findings of “fraud, wilful misstatement or suppression of facts” and not merely echo the wording of the provision or an audit objection.
  • Declined to entertain the constitutional challenge to Section 16(2)(c) of the CGST Act, in view of the binding pronouncement of the Hon’ble Supreme Court.
  • Remanded the case to the adjudicating authority for a fresh decision, after following proper procedure and recording reasoned findings.

2. Factual background and proceedings

(i) Business and audit period

M/s. Treco Wire India Private Limited, the Petitioner, is a registered manufacturer of copper wire under the CGST Act. The Revenue authorities conducted a GST audit for the period from July 01, 2017 to March 31, 2021.

Following the audit:

  • An Audit Memo dated July 23, 2023 alleged that the Petitioner had availed ITC of Rs. 3,34,21,261/- on procurements from suppliers whose registrations had been retrospectively cancelled from dates prior to the relevant invoices.
  • Interest of Rs. 50,30,256/- was also proposed on the footing that payments to certain suppliers were delayed beyond 180 days.
  • An Audit Report in Form GST ADT-02 was then issued on July 27, 2023.

The assessee disputed the objections, asserting that:

  • All purchases represented genuine commercial supplies,
  • The concerned suppliers were shown as active and registered on the Government portal at the time of the transactions, and
  • There was no element of fraud, misrepresentation, or suppression on its part.

(ii) Show Cause Notice and Order-in-Original

Subsequently, the department issued:

  • An intimation in Form GST DRC-01A, and thereafter
  • A Show Cause Notice dated September 22, 2023 (“SCN”) under Section 74 of the CGST Act.

In its reply, the Petitioner specifically pleaded that:

  • The ingredients of Section 74 were not met,
  • No particulars of fraud, wilful misstatement or suppression were either alleged or established, and
  • Retrospective cancellation of suppliers’ registrations alone cannot invoke Section 74.

Despite these contentions, the adjudicating authority passed the Impugned Order on January 15, 2024:

  • Confirming the ITC demand of Rs. 3,34,21,261/- under Section 74(1) along with interest under Section 50 and an equal penalty, and
  • Confirming the interest demand of Rs. 50,30,256/- on delayed payment beyond 180 days.

(iii) Writ petition before the Delhi High Court

The Petitioner challenged:

  • The SCN and the Impugned Order on merits and on procedural grounds, and
  • The constitutional validity of Section 16(2)(c) and the proviso to Section 16(2) of the CGST Act.

Key grounds included:

  • The Impugned Order did not disclose:
    • Names or GSTINs of suppliers,
    • Invoice numbers or dates,
    • Effective dates of cancellation of the suppliers’ registrations, or
    • The underlying material relied upon for alleging retrospective cancellation.
  • Neither the SCN nor the Order contained any concrete details indicating fraud, wilful misstatement, or suppression by the Petitioner.
  • Merely because a supplier’s registration is later cancelled, that event by itself cannot trigger Section 74.

The department sought to justify the demand by referring to the audit findings and an earlier order dated September 24, 2025 in W.P.(C) 14428/2025 in which the Petitioner was also involved. However, when queried by the Court, the department could not definitively state whether fraudulent ITC from any specific entity was in issue.

3. Issues framed by the Court

The Delhi High Court examined two primary questions:

(a) Whether Section 16(2)(c) of the CGST Act should be struck down or read down in favour of bona fide recipients where the supplier has not actually paid the tax to the Government?

(b) Whether an ITC demand under Section 74 based solely on retrospective cancellation of suppliers’ registrations can be sustained where:

  • The suppliers and invoices are not identified, and
  • No specific finding is recorded on fraud, wilful misstatement, or suppression of facts by the assessee?

4. Court’s findings on Section 16(2)(c) – constitutional challenge rejected

The Court refused to entertain the challenge to the constitutional validity of Section 16(2)(c) in light of the subsequent judgment of the Hon’ble Supreme Court in:

  • Bhandari Scraps Traders v. Union of India [SLP (C) No. 23931/2026 dated July 24, 2026]

In that matter, the Supreme Court affirmed the decision of the Hon’ble Gujarat High Court in:

  • Maruti Enterprises v. Union of India [2026 SCC OnLine Gujarat 4013]

which had upheld Section 16(2)(c) and clarified that the position of a purchasing dealer under the CGST regime is not on par with that of a bona fide purchasing dealer under the Delhi Value Added Tax Act, 2004.

Consequently:

  • The Delhi High Court held that the validity of Section 16(2)(c) is now settled.
  • Prayers to strike down or read down the provision were rejected.

5. Court’s analysis on Section 74 demand and adjudication defects

(i) Distinction between eligibility and fraud-based recovery

The Court underlined an important conceptual separation:

  • Section 16(2)(c) lays down an eligibility condition for availing ITC: tax charged on the supply should have been paid to the Government.
  • Section 74(1) is a recovery provision with extended limitation and equal penalty where tax is not paid or ITC is wrongly availed or utilised “by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax”.

Therefore:

  • Even if, on facts, an assessee is found to be ineligible for ITC under Section 16(2)(c), this does not automatically import the element of fraud or suppression required for Section 74.
  • Invocation of Section 74 must be independently justified with concrete factual material demonstrating fraud, wilful misstatement, or suppression.

(ii) Mandatory factual foundation for Section 74 orders

The Court carefully scrutinised the Impugned Order and found that it:

  • Simply replicated the audit objection.
  • Did not provide:
    • The names or GSTINs of the suppliers,
    • Invoice numbers or dates,
    • The date from which each supplier’s registration was cancelled,
    • Supplier-wise breakup of ITC allegedly wrongly availed, or
    • The material evidencing cancellation and its effective date.
  • Failed to discuss or refute the Petitioner’s plea that all suppliers were active and registered when the invoices were issued.

The Court reiterated that Section 75(6) requires that the order must set out “the relevant facts and the basis of the decision.” In the context of Section 74, this necessarily includes: