The Supreme Court has dismissed the Special Leave Petition (SLP) filed by the Uttar Pradesh State GST Department by leaving undisturbed the Allahabad High Court’s judgment that quashed proceedings initiated under Section 74 of the UPGST Act against the taxpayer.
The bench of Justice Aravind Kumar and Justice Vipul M. Pancholi condoned the delay in filing the petition but declined to interfere with the High Court’s decision, dismissing the matter at the admission stage.
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Background of the Dispute
The litigation originated from proceedings initiated by the State GST authorities under Section 74 of the Uttar Pradesh GST Act, alleging that Safecon Lifescience had wrongly availed Input Tax Credit (ITC) on purchases made from M/s Unimax Pharma Chem.
The department alleged that the supplier’s registration had subsequently been cancelled and, therefore, the ITC claimed by the purchaser was inadmissible. Based on this allegation, a show cause notice was issued, followed by an adjudication order confirming the demand, which was later affirmed by the appellate authority.
Before the Allahabad High Court, Safecon Lifescience argued that the transactions were entirely genuine. It contended that the supplier was duly registered at the time of supply; medicines were actually supplied; purchases were supported by tax invoices, e-way bills, transport documents and purchase records; consideration was paid through banking channels; the supplier had filed GSTR-1 and GSTR-3B returns; and the tax payments were reflected on the GST portal.
The petitioner further argued that there was no allegation of fraud or suppression on its part and that the department had merely relied upon information received from the Central Intelligence Unit regarding the supplier’s own transactions.
Justice Piyush Agrawal observed that the taxpayer had produced substantial documentary evidence demonstrating the actual movement of goods, payment through banking channels and filing of statutory GST returns. The authorities, however, failed to rebut this evidence with any cogent material.
The Court held that once genuine movement of goods and payment of tax stood established, proceedings under Section 74 could not be sustained merely because doubts had been raised regarding the supplier’s own purchases.
Importantly, the High Court noted that the authorities had acted solely on information received from the Central Intelligence Unit without independently verifying its correctness before using it against the registered dealer. The Court further found that the material relied upon by the department had not even been supplied to the taxpayer, thereby violating principles of natural justice.
A significant aspect of the judgment was the Court’s reliance on the CBIC Circular dated 13 December 2023, which clarifies that proceedings under Section 74 can be initiated only where there exists material indicating fraud, wilful misstatement or suppression of facts with intent to evade tax.
The High Court observed that neither the adjudicating authority nor the appellate authority had recorded any finding that Safecon Lifescience had committed fraud, wilfully misstated facts or suppressed material information. Consequently, invocation of Section 74 itself was held to be legally unsustainable.
The Court also relied upon its earlier decision in M/s Khurja Scrap Trading Company, reiterating that Section 74 cannot be invoked merely because tax has not been paid somewhere in the supply chain. It further referred to the Supreme Court’s decision in Continental Foundation Joint Venture Holding v. Commissioner of Central Excise, wherein the apex court explained that “suppression” or “wilful misstatement” necessarily requires an intention to evade tax and cannot be inferred from mere omissions or errors.
Holding that there was no material establishing fraud, wilful misstatement or suppression by the taxpayer, the Allahabad High Court quashed both the appellate order dated 20 December 2022 passed by the Additional Commissioner (Appeal), and the adjudication order dated 12 January 2022 passed by the Deputy Commissioner, Commercial Tax.
Accordingly, the writ petition was allowed.
The State GST Department challenged the High Court judgment before the Supreme Court through a Special Leave Petition. However, after condoning the delay, the Supreme Court declined to grant leave and dismissed the matter at the admission stage, thereby allowing the High Court’s ruling to attain finality.
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