GSTAT Thiruvananthapuram: Mere ITC Reconciliation Differences Insufficient to Invoke Section 74 — Fraud Must Be Proven
Overview of the Ruling
The GST Appellate Tribunal, Thiruvananthapuram Bench, delivered a significant ruling in M/s. Santhome Latex Enterprises v. The Commissioner of CGST, Thiruvananthapuram, Final Order No. 04/TVP/KERALA/2026 dated 21.08.2026, addressing a practice that has long troubled GST assessees and practitioners alike — the routine invocation of Section 74 of the CGST Act, 2017 in cases involving nothing more than ITC reconciliation differences emerging from return data.
The Tribunal categorically held that a reconciliation gap between GSTR-2A / Table 8 figures and ITC claimed in GSTR-3B does not, by itself, constitute fraud, willful misstatement, or suppression of facts with intent to evade tax — the essential prerequisites for invoking Section 74. It further held that the first appellate authority cannot sustain a demand on grounds that were never part of the original show cause notice, as doing so amounts to a serious violation of natural justice principles.
The ruling relies on CBIC Instruction No. 05/2023-GST dated 13.12.2023 and seminal Supreme Court decisions, and marks one of the earliest substantive pronouncements from the newly functional GSTAT on this critical issue.
Background: The Systemic Problem with Section 74 Invocations
How Section 74 Was Designed vs. How It Is Being Used
Section 74 of the CGST Act, 2017 was enacted as an exceptional, high-threshold provision. It applies specifically to situations involving fraud, willful misstatement, or suppression of facts with an intent to evade tax, and carries with it an extended limitation period along with stringent penalty consequences under Section 74(9) read with Section 122(2)(b).
The legislative intent was clear — Section 74 was never meant to be the default provision for every audit discrepancy. Section 73 of the CGST Act, 2017, which operates without the fraud/suppression threshold, was designed to address routine contraventions and bona fide differences.
Despite this clear statutory design, departmental practice has evolved in a troubling direction. Audit proceedings routinely culminate in Section 74 notices regardless of whether any element of fraud or deliberate suppression is even remotely evident. The sequence has become predictable:
- An audit identifies a difference between GSTR-2A / Table 8 data and GSTR-3B ITC claims
- Without any investigation into the nature or cause of the difference, a show cause notice is issued under
Section 74(1) - The notice reproduces boilerplate statutory language — alleging "suppression of facts" and "malafide intent to evade tax" — without any supporting evidence
- No explanation is offered as to why
Section 74is preferred overSection 73
Reconciliation differences that arise from timing mismatches, supplier-side non-compliance, or genuine classification disputes end up being characterised as fraudulent conduct — without any inquiry into the assessee's state of mind or intent.
Adding to the difficulty, assessees historically found little meaningful relief within the departmental hierarchy itself. Even where a fair adjudicating officer dropped an unsustainable demand, departmental review and first-appeal mechanisms frequently reversed such orders. The practical recourse was often a writ petition before the High Court — costly, time-consuming, and uncertain in outcome.
The Thiruvananthapuram Bench of the GSTAT has now addressed this pattern squarely and with admirable directness.