The Goods and Services Tax Appellate Tribunal (GSTAT), Thiruvananthapuram, has set aside a penalty imposed under Section 74 of the Central Goods and Services Tax Act, 2017, holding that detection of a tax violation during an audit does not automatically establish wilful suppression of facts.
The bench of Subramanya Rayaprol (Vice President) and Ramamoorthi Sriram (Technical Member) ruled that a failure to comply with the input tax credit conditions under Section 16(2) cannot, by itself, justify invoking Section 74. The department must identify the specific facts allegedly suppressed and establish the statutory obligation to disclose them.
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The appellant/assessee, a partnership firm engaged in the retail sale of gold, silver and diamond articles, underwent a departmental audit covering January 2019 to March 2021.
The audit identified instances in which the firm had availed input tax credit but had not paid the corresponding value of supplies and tax to its suppliers within the stipulated period. The department treated this as a violation of the supplier-payment condition governing input tax credit and raised a demand of approximately ₹7.66 lakh.
The adjudicating authority confirmed the tax demand, interest under Section 50(1), and an equivalent penalty under Section 74. The Joint Commissioner (Appeals), Kochi, subsequently rejected the firm’s appeal through an order dated August 24, 2023.
Before the Tribunal, the appellant argued that fraud, wilful misstatement or suppression of facts to evade tax had not been established. It also contended that the authorities had failed to consider an agreement between firms owned by a husband and wife.
The Tribunal recorded that the appellant had already remitted ₹7,66,446 towards the tax liability on May 17, 2023. The firm did not contest its interest liability and produced evidence of a ₹2.5 lakh payment towards interest made on September 7, 2026. It requested permission to pay the remaining interest in three instalments.
Consequently, the substantive issue requiring determination was whether the penalty under Section 74 could be sustained.
The Tribunal found that it alleged wilful suppression of material facts without specifying what those facts were.
The notice reasoned that the taxpayer possessed information about inward supplies and payments but had failed to correctly assess eligible credit and pay the amount corresponding to the unpaid supplies. It then alleged an intention to evade tax.
The Tribunal held that this formulation was vague and lacked the specificity necessary to support proceedings under Section 74.
It also rejected the suggestion that every contravention of Section 16(2) automatically attracts Section 74. The Bench noted an inconsistency within the notice itself: while one allegation linked a Section 16(2) violation to Section 74, another allegation involving ineligible credit referred to a penalty under Section 73.
The applicability of Section 74 had therefore not been established either factually or legally at the notice stage. The Tribunal held that the penalty proceedings were void from their inception.
Relying on the Supreme Court’s decision in Commissioner of Central Excise v. Brindavan Beverages (P) Ltd., the Bench emphasised that a show-cause notice forms the foundation of the department’s case. Vague allegations prevent a taxpayer from receiving a proper opportunity to answer the case against it.
The first appellate authority had reasoned that the violation came to light only through an audit and that the taxpayer possessed full knowledge of its purchase transactions.
The Tribunal rejected this reasoning on two grounds. First, the audit-discovery ground had not been included in the show-cause notice and could not be introduced subsequently to support the penalty.
Second, discovery during an audit could not create an automatic presumption of wilful suppression. Accepting that approach would mean that every violation detected by audit would necessarily attract Section 74, which the Tribunal considered legally untenable.
The Tribunal also disapproved of the appellate authority’s observation that there was no evidence disproving the allegation that the contravention was wilful.
This reasoning improperly shifted the burden to the taxpayer, the Bench held. In the absence of a clear statutory provision to the contrary, the Revenue must establish the allegation supporting the penalty. In this case, it had not produced proof of wilful suppression.
Addressing Explanation 2 to Section 74, the Tribunal said a finding of suppression must identify the particular facts or information that were not declared. It must also identify the return, statement, report or document in which disclosure was mandatory, together with the relevant statutory provisions.
The appellate order did not establish these elements.
The department argued before the Tribunal that the appellant was required to report the credit becoming ineligible because of non-payment to suppliers within 180 days, and that its failure to do so justified Section 74 proceedings.
Although the Tribunal acknowledged that these arguments had considerable force, it found that the supporting grounds were absent from the show-cause notice and the earlier orders. They could not be introduced for the first time at the second appellate stage.
The Bench relied on the Supreme Court’s decision in G.R. Infra Projects Limited Ratlam v. State of Madhya Pradesh, dated August 19, 2026, for the principle that the requirements necessary to sustain a notice or order must appear within that notice or order itself. Subsequent submissions cannot repair the original deficiency.
The Tribunal allowed the appeal concerning the Section 74 penalty and set aside the appellate order to that extent, granting consequential relief.
It expressly directed the appellant to pay the remaining interest. Although the firm had sought three instalments, the operative order did not expressly grant that request.
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