Misuse of Section 74 for 26AS vs GSTR‑1 Mismatches: Protecting Genuine GST Assessees from Fraud Allegations

1. Emerging Trend: Section 74 Notices Triggered Only by 26AS vs GSTR‑1 (B2B) Comparison

Across Karnataka, a growing number of GST assessees have recently been served with notices invoking Section 74 of the CGST Act for FY 2020‑21, all following an almost identical pattern and template. Many of these notices refer to a central instruction/circular issued vide order Adcom (Audit I & C) JDN/CR/2022‑23 dated 20.02.2023. The basic allegation: business‑to‑business (B2B) outward supplies reported in Form 26AS do not tally with B2B figures disclosed in GSTR‑1.

Consider a representative case of one of my clients to understand the issue clearly. For FY 2020‑21, the assessee has:

  • Properly recorded all outward supplies in the books of account
  • Correctly reported supplies in GSTR‑1, GSTR‑3B and GSTR‑9
  • Disclosed the same turnover in the income‑tax return, matching Form 26AS

The numbers (rounded for illustration) were:

  • B2C outward supplies: about ₹1,28,50,000.00
  • B2B outward supplies: about ₹71,25,000.00

These amounts are fully reconcilable across:

  • Books of account
  • GSTR‑1, GSTR‑3B and GSTR‑9
  • Income‑tax return and Form 26AS

There is no discrepancy in total turnover between the GST records and the income‑tax records.

Despite this, the department has:

  1. Looked only at B2B entries appearing in Form 26AS (where TDS/TCS is reflected)
  2. Ignored B2C outward supplies entirely (which naturally do not appear in Form 26AS)
  3. Performed a one‑sided “comparison” between 26AS B2B and GSTR‑1 B2B figures
  4. Treated the notional difference as unreported B2B turnover
  5. Issued an intimation in Form DRC‑01A under Section 74(5) proposing tax, interest and 100% penalty aggregating to approximately ₹52,40,000.00

When one actually reconciles GSTR‑1 (B2B + B2C) with the books and the income‑tax return, there is no short payment of tax. The supposed “difference” exists only because the department has chosen to ignore B2C supplies while comparing figures.

Yet, instead of treating this as a routine reconciliation matter, the notice has been couched under Section 74, a provision reserved for fraud, wilful misstatement, or suppression of facts with intent to evade tax. This raises serious questions of legality and fairness.

2. Proper Scope and Purpose of Section 74 of the CGST Act

Section 74 of the CGST Act is an enhanced enforcement provision designed for grave instances of evasion. It can be invoked only when non‑payment, short‑payment of tax, wrongful availment or utilisation of ITC, or erroneous refund arises “by reason of fraud, or any wilful misstatement, or suppression of facts to evade tax.”

Typical scenarios where Section 74 is legitimately applicable include:

  • Issuance of fake invoices and availing of bogus ITC without any actual supply
  • Intentional suppression of turnover, such as keeping a parallel set of books
  • Non‑deposit of collected GST despite charging it from customers
  • Deliberate misclassification, misreporting, or use of shell entities clearly aimed at tax evasion

Judicial decisions and standard commentaries on GST law underscore a few core principles:

  • Fraud, suppression and wilful misstatement are “jurisdictional facts” for invoking Section 74. The department must demonstrate some material showing deliberate intent to evade tax.
  • Mere differences in reconciliation or computation, or mismatches in returns, do not by themselves justify the use of Section 74. Such matters are ordinarily covered by Section 73 (or now Section 74A), which carry a shorter limitation and a milder penalty regime.
  • If the department resorts to Section 74 only because the time limit for Section 73 has expired, without proof of fraud or suppression, the action becomes colourable and contrary to the statutory scheme.

Thus, Section 74 is meant as an exceptional tool against real evasion, not a default mechanism for every data mismatch detected by the system.

3. Why Using Section 74 for 26AS–GSTR‑1 B2B Mismatches Is Legally Flawed

The recurring pattern in the Karnataka notices for FY 2020‑21 can be summarised as follows:

  1. Extract B2B turnover figures from Form 26AS (based on TDS/TCS entries).
  2. Compare them only with B2B outward supplies declared in GSTR‑1.
  3. Completely disregard B2C outward supplies because they naturally do not appear in Form 26AS.
  4. Treat the resulting notional gap as undeclared B2B turnover.