Section 61 Scrutiny Not a Mandatory Precondition for Initiating Proceedings Under Section 74A of CGST Act: Allahabad High Court

Overview of the Judgment

The Allahabad High Court, in Neelkanth Entrepreneurs Private Limited Vs State of U.P. (Writ Tax No. 1024 of 2026, decided on 09.09.2026), dismissed a writ petition challenging a Show Cause Notice issued under Section 74A(1) of the Central Goods and Services Tax Act, 2017. The Court authoritatively ruled that scrutiny of returns under Section 61 of the CGST Act is a pre-adjudicatory verification tool and does not constitute the sole or mandatory gateway for initiating demand proceedings under Section 73 or Section 74A. The judgment provides significant doctrinal clarity on the interplay between return scrutiny and adjudication provisions under the GST framework.

Background and Facts of the Case

M/s Neelkanth Entrepreneurs Private Limited, holding GSTIN No. 09AADCN8452H1Z6, is a private limited company engaged in the supply of works-contract services under SAC No. 9954. The assessee was involved in executing large-scale sub-contract works for NCC Limited — a public infrastructure company — across the States of Bihar, Jharkhand, Uttar Pradesh, and Maharashtra. The nature of the works included:

• Excavation and diaphragm-wall construction for the Old Anicut (barrage) irrigation project at Dehri, Bihar
• Development of distribution infrastructure under the Revamped Distribution Sector Scheme (R.D.S.S.) in Jharkhand and Uttar Pradesh
• Installation of Advanced Metering Infrastructure/smart prepaid meters for North Bihar Power Distribution Company Limited and for MSEDCL in Maharashtra
• Rural civil and water-supply works under the State Water and Sanitation Mission in Uttar Pradesh

Individual contract values with NCC Limited ranged approximately from ₹1.24 crore to ₹8.43 crore, with work orders and completion certificates forming part of the record.

For Financial Year 2025-26, the assessee claimed to have sub-contracted portions of the above works on a back-to-back basis to eighteen registered sub-contractors, all duly registered under GST at the relevant time. These sub-contractors included, among others:

The assessee maintained that it possessed comprehensive documentation, including work orders, tax invoices from sub-contractors, measurement sheets, bank statements reflecting payments through banking channels, GSTR-2A/B2B summaries, GST registration status documents showing sub-contractors as active at the relevant time, and signed undertakings from authorized signatories of sub-contractors confirming execution of works and discharge of GST liability.

The Impugned Show Cause Notice

The Deputy Commissioner, State Tax, Jurisdiction Lucknow, issued a Show Cause Notice dated 09.07.2026 under Section 74A(1) of the CGST Act, 2017, proposing to deny Input Tax Credit availed by the assessee, along with levy of tax, interest, and penalty. The principal allegation in the notice was that the works sub-contracted to the eighteen firms were bogus and that those firms were non-existent, thereby rendering the Input Tax Credit wrongfully availed.

Without filing any reply to the notice, the assessee preferred a writ petition before the Allahabad High Court seeking:

1. Quashing of the Show Cause Notice dated 09.07.2026
2. A declaration that Section 16(2)(c) of the CGST Act, 2017 and the corresponding provision of the UPGST Act, 2017 are ultra vires Articles 14, 19(1)(g), and 300A of the Constitution of India, or in the alternative, that the provision be read down to exclude bona fide recipients who had otherwise complied with Section 16(2)(a), (b), and (d) and had paid tax to the supplier

Preliminary Issue: Constitutional Validity of Section 16(2)(c)

At the outset, counsel for the assessee fairly conceded the second prayer in view of a subsequent development. The Supreme Court had dismissed the Special Leave Petition filed in Bhandari Scrap Traders Vs Union of India & Ors., reported in 2026 SCC OnLine SC 1570, vide order dated 24 July 2026, thereby affirming the Gujarat High Court's judgment in Maruti Enterprises Vs Union of India & Ors. This affirmation settled that:

Input Tax Credit (ITC) is a conditional statutory benefit and not an absolute or vested right. ITC is available only if the supplier has actually deposited the corresponding GST with the Government. The Supreme Court declined to dilute or read down this statutory requirement under Section 16(2)(c) of the CGST Act, 2017.

Accordingly, the assessee did not press the constitutional challenge.

Core Legal Issues Framed by the Court

The Court identified three primary questions for determination:

1. Whether the impugned Show Cause Notice dated 09.07.2026 was vitiated by non-compliance with Section 61 of the GST Act read with Rule 99 of the CGST Rules, 2017
2. Whether invocation of Section 74A(5)(ii) was without jurisdiction for want of the necessary ingredients of fraud, wilful misstatement, or suppression of facts
3. Whether, on the facts of the present case, the Court ought to exercise its extraordinary writ jurisdiction under Article 226 of the Constitution to interdict the Show Cause Notice at the threshold

Issue I: Is Section 61 Scrutiny a Mandatory Precondition for Proceedings Under Section 74A?

Nature and Scope of Section 61