The Goods and Services Tax Appellate Tribunal (GSTAT) has ruled that a mismatch between input tax credit claimed in Form GSTR-3B and the credit reflected in Form GSTR-2A cannot, by itself, justify proceedings under Section 74 of the Central Goods and Services Tax Act, 2017.

The bench of Srikanth Venkatraman (Judicial Member) and Sudha Koka (Technical Member) has observed that the GST authorities must establish a clear connection between the wrongful availment of ITC and fraud, wilful misstatement or suppression of facts before invoking Section 74 and imposing a penalty equal to 100% of the tax.

Buy Now: E-Magazine: 1000+ Landmark GST Judgments (2017–2026)

The dispute arose from information gathered by the Anti-Evasion Wing of the Bengaluru West GST Commissionerate. The department detected a mismatch between the ITC claimed by the taxpayer in its GSTR-3B returns and the credit available in GSTR-2A for the period between July 2017 and November 2021.

On December 28, 2021, the Superintendent of the Anti-Evasion Wing directed the taxpayer to furnish details relating to its inward supplies. The information was supplied on January 13, 2022.

After verification, the department found that the taxpayer had allegedly availed excess ITC amounting to ₹2,74,20,293.

The taxpayer acknowledged the discrepancy and paid the disputed tax along with applicable interest on January 18, 2022. The payment was made before the formal investigation was initiated on January 21, 2022.

In her statement before the department, the proprietrix admitted that excess ITC had been availed but maintained that it resulted from an oversight. She also stated that the excess credit had not been utilised.

Despite the payment of tax and interest, the department issued a show cause notice on February 28, 2023, invoking Section 74 of the CGST Act.

The notice alleged that the taxpayer had suppressed the fact of excess ITC availment in its GSTR-3B returns and had made payment only after the discrepancy was detected by the Anti-Evasion Wing.

The adjudicating authority subsequently confirmed the ITC demand of ₹2.74 crore, along with interest under Section 50. It also imposed an equivalent penalty of ₹2.74 crore under Section 74(1).

According to the adjudicating authority, the taxpayer had availed ITC without satisfying the eligibility conditions prescribed under Section 16 of the CGST Act. Since the taxpayer did not pay the concessional penalty of 15% along with tax and interest, a penalty equal to 100% of the tax was imposed.

The Commissioner (Appeals) upheld the order on June 29, 2024. The appellate authority observed that the taxpayer had paid the disputed amount only after the mismatch was pointed out by the department and had not independently disclosed the excess ITC. It therefore treated the case as involving suppression of facts.

The taxpayer argued that the entire tax and interest had been paid during the information-gathering and verification stage, even before formal investigation proceedings were initiated.

It was submitted that when tax and interest are paid before the issuance of a show cause notice, the proceedings are required to be concluded under Section 73 of the CGST Act unless the department establishes fraud, wilful misstatement or suppression of facts.

The taxpayer maintained that the mismatch arose primarily because of defaults attributable to third-party suppliers. Such a procedural mismatch, it argued, could not amount to suppression of facts within the meaning of Explanation 2 to Section 74.

It was further contended that the extended limitation period under Section 74 could not be invoked mechanically. The department was required to prove the presence of an intention to evade tax.

The department, however, argued that the excess ITC came to light only through verification conducted by its Anti-Evasion Wing. It maintained that the payment was made pursuant to the departmental inquiry and that the taxpayer’s failure to disclose the excess credit constituted suppression.

The GSTAT observed that Section 73 applies where tax has not been paid, has been short-paid, has been erroneously refunded, or where ITC has been wrongly availed or utilised for reasons other than fraud, wilful misstatement or suppression of facts.

Section 74, on the other hand, applies only when such non-payment, short payment, erroneous refund or wrongful ITC availment results from fraud, wilful misstatement or suppression of facts.

Relying on the Supreme Court’s ruling in Tata Steel Limited v. Union of India, the Tribunal stated that a proper officer must do more than merely identify an ITC mismatch or short payment before invoking Section 74.

The officer must be satisfied that the discrepancy resulted from fraud, wilful misrepresentation or suppression. The foundational facts supporting such a conclusion must also be evident from the show cause notice.

The GSTAT said that merely reproducing the statutory expressions “fraud”, “wilful misstatement” or “suppression” would not establish the application of mind necessary for invoking the extended limitation period.

The Tribunal held that an ITC mismatch may enable the proper officer to determine tax liability under Section 73. However, something more is required to bring the matter within Section 74.

“There must be a clear link between the mismatch and the alleged fraud, wilful misstatement or suppression of facts,” the Tribunal observed.

In the present case, the demand arose from a mismatch between the ITC claimed in GSTR-3B and the credit appearing in GSTR-2A. The Tribunal noted that GSTR-2A is a statement generated on the GST common portal based on details furnished by suppliers in their GSTR-1 returns.

The department did not dispute the genuineness of the underlying transactions or the existence of the suppliers. It also failed to establish that the mismatch was caused by any deliberate conduct on the taxpayer’s part.

The GSTAT rejected the department’s argument that Section 74 was attracted merely because the taxpayer paid the disputed amount after the mismatch was pointed out by the proper officer.

It noted that both Sections 73(5) and 74(5) permit a taxpayer to pay tax and interest before the issuance of a show cause notice. The statutory language expressly permits payment either on the taxpayer’s own ascertainment or on the basis of tax ascertained by the proper officer.

According to the Tribunal, this language recognises that an officer may point out an omission during audit or verification. Once the taxpayer accepts the officer’s ascertainment and pays the tax and interest in a case not involving fraud or suppression, Section 73(6) prohibits the officer from serving a further notice in respect of the amount paid.

Therefore, the mere fact that payment followed departmental verification could not automatically convert an ordinary ITC mismatch case into one involving fraud or suppression.

The Tribunal also examined the meaning of “suppression” under Explanation 2 to Section 74.

It observed that suppression involves non-declaration of facts or information that a taxable person is required to disclose in a return, statement, report or other document under the GST law. It can also cover a failure to furnish information sought in writing by the proper officer.

The Tribunal said that there must be a deliberate non-disclosure of the required information.

In the present case, suppression was alleged merely on account of the ITC mismatch and not because the taxpayer had withheld any information sought by the department. The Tribunal found that the mismatch arose from defaults committed by third-party suppliers.

“A default by a third-party supplier cannot be attributed to the appellant to sustain the charge of suppression,” the GSTAT held.

The GSTAT concluded that neither the adjudicating authority nor the Commissioner (Appeals) had established any link between the ITC mismatch and the alleged suppression of facts.

Since the genuineness of the transactions and suppliers was not questioned, and the taxpayer had paid the excess ITC with interest before issuance of the show cause notice, the matter was governed by Section 73 rather than Section 74.

The Tribunal accordingly set aside the appellate order and held that the penalty imposed under Section 74 was invalid and unjustified.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Audit Detection Alone Can’t Trigger 100% GST Penalty Without Proof of Fraud or Suppression: GSTAT