Karnataka High Court strikes down Section 74 GST order for absence of fraud or wilful misstatement allegation

Background of the dispute

In Pokala Malleswara Reddy Vs Commercial Tax Officer, the Karnataka High Court examined whether proceedings could validly be initiated under Section 74 of the Central Goods and Services Tax Act, 2017 / Karnataka Goods and Services Tax Act, 2017 (collectively, “the Act”) without any allegation of fraud, wilful misstatement or suppression in the Show Cause Notice (SCN).

The assessee approached the High Court challenging:

  • An Adjudication Order dated 24.02.2026 passed under Section 74(9) of the Act; and
  • The summary of the order issued on the same date.

Both were produced as Annexures-A and A1 in the writ petition.

The genesis of the proceedings lay in a mismatch between Form GSTR‑3B and Form GSTR‑2A, which led the department to initiate scrutiny and subsequently issue a SCN under Section 74.

Chronology of departmental action

Initial summons and mismatch issue

  1. On 20.01.2025, the Joint Commissioner of Commercial Taxes issued summons to the assessee.
  2. The summons required the assessee to explain discrepancies between Form GSTR‑3B and Form GSTR‑2A for the relevant tax period.
  3. An authorised representative of the assessee did appear in response to the summons.
  4. However, no written reply or explanation was submitted to address the mismatch despite the appearance.

Issuance of SCN under Section 74

Because no response was filed, the department proceeded to:

  • Issue a Show Cause Notice dated 30.09.2025 in Form GST DRC‑01.
  • The SCN proposed to initiate proceedings under Section 74 of the Act.

The core departmental allegation was based on input tax credit (ITC) mismatch or related discrepancies inferred from returns (GSTR‑3B vs GSTR‑2A). However, no specific allegation of fraud, wilful misstatement or deliberate suppression was set out in the SCN.

Arguments presented on behalf of the assessee

Counsel for the assessee, Sri Sandeepani A Neglur, advanced two principal contentions:

1. Lack of jurisdiction under Section 74

  • It was argued that the very foundation of jurisdiction under Section 74 is the presence of allegations that:

    • the assessee has committed fraud, or
    • made a wilful misstatement, or
    • suppressed facts deliberately with intent to evade tax.

  • Counsel submitted that the SCN dated 30.09.2025 did not contain any averment or reference suggesting:

    • fraud,
    • intention to evade tax, or
    • deliberate withholding of information.

  • In the absence of such critical ingredients, invoking Section 74 was said to be without jurisdiction, rendering the entire proceedings and the resultant order legally unsustainable.

2. Improper use of Section 74 to circumvent limitation