The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru Bench, has held that mere non-disclosure of transactions in GST returns or payment of tax following audit verification cannot, without examining the surrounding circumstances, justify the imposition of a penalty under Section 74 of the Central Goods and Services Tax Act, 2017.
The Bench of Srikanth Venkatraman (Judicial Member) and Sudha Koka (Technical Member) cancelled penalties relating to reverse charge liabilities and non-reversal of input tax credit (ITC) and found that the authorities had relied on omissions in the company’s returns without considering its explanations or establishing an intention to evade tax.
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The company, which provides manpower supply and support services, underwent a departmental audit covering July 2017 to March 2020. Although the audit identified nine alleged non-compliances, the appeal before the Tribunal concerned penalties under Section 74 on four issues: GST under the reverse charge mechanism (RCM) on legal fees and sponsorship services; supplies received from unregistered persons; rent-a-cab services; and non-reversal of ITC relating to an amount payable to a vendor that had been written off.
A show-cause notice dated February 10, 2023, invoked Section 74. The adjudicating authority subsequently upheld its application, reasoning that the value of the relevant services had not been disclosed in Form GSTR-3B and therefore constituted suppression within the meaning of Explanation 2 to Section 74.
The Additional Commissioner (Appeals), Mysuru, confirmed the penalties on these four issues while granting relief on other audit objections. The Revenue did not challenge that relief.
Before the Tribunal, the company confined its arguments to the imposition of penalties under Section 74(1). It submitted that it had discharged the disputed tax liabilities with applicable interest before the show-cause notice and that the relevant information was available in its books of account.
For legal and sponsorship services, the company explained that the services were provided directly to its clients. It paid advocates on clients’ behalf as a business obligation and subsequently recovered the actual amounts through debit notes. It maintained that these payments did not form part of the taxable value of its manpower services.
Regarding supplies from unregistered persons, the company stated that site supervisors incurred small operational expenses in connection with approximately 30,000 personnel deployed across factories and offices. According to the company, the reimbursements did not exceed ₹5,000 per day. Nevertheless, it had paid the applicable tax and interest.
On rent-a-cab services, the company submitted that the service provider had issued invoices charging GST, which it paid. It therefore believed that the tax liability had been discharged through payment to the vendor. The company stated that it paid the disputed tax again to avoid litigation.
For the ITC issue, it argued that the underlying transaction was a money transaction outside the scope of supply and that the authorities had failed to consider this explanation.
The Revenue defended the penalties, contending that payment had followed audit verification and that failure to disclose the transactions in statutory returns amounted to suppression.
Examining the rival submissions, the Tribunal held that the decisive question was whether the circumstances satisfied the statutory conditions for invoking Section 74, rather than merely whether tax had remained unpaid within the prescribed time.
It distinguished Section 73, which addresses non-payment or short payment for reasons other than fraud, wilful misstatement or suppression, from Section 74, which applies where those elements cause the tax default.
The Tribunal also noted that Sections 73(5) and 74(5) both contemplate pre-notice payment based either on the taxpayer’s own ascertainment or on tax ascertained by the proper officer. Consequently, an omission being identified during audit does not, by itself, determine which provision applies.
“The mere omission in a statutory return, or the subsequent payment of tax pursuant to audit verification, cannot, without examining the relevant circumstances, be treated as conclusive of the ingredients of Section 74(1),” the Tribunal observed.
At the same time, it clarified that recording a transaction in the books of account does not automatically establish the absence of suppression. The existence or absence of suppression must be assessed against the facts and statutory disclosure requirements.
The Bench relied on the Supreme Court decision in Tata Steel Limited v. Union of India, reported in (2026) 45 Centax 361, as cited in its order. It explained that the officer must be satisfied that fraud, wilful misstatement or suppression caused the tax shortfall. Mechanically using those expressions does not establish the necessary foundation for invoking Section 74.
The Tribunal also referred to CBIC Instruction No. 05/2023-GST dated December 13, 2023, which, it noted, requires material evidence of fraud, wilful misstatement or suppression to evade tax, with such evidence forming part of the show-cause notice.
Applying these principles, the Bench found that the authorities had failed to examine the company’s explanations. For legal and sponsorship services, it accepted that the company had reasonable cause for its treatment of payments made on clients’ behalf. On expenses involving unregistered persons, it noted that the explanation concerning small reimbursements and the relevant exemption framework had not been verified before the penalty was imposed.
For rent-a-cab services, the Tribunal found reasonable cause in the company’s belief that payment of invoices carrying GST discharged the tax obligation. On the ITC issue, it noted that the information was available in records supplied to the authorities and found no intention to evade tax.
The Bench ultimately concluded that Section 74 had been invoked merely because the returns did not include the value of supplies. The genuineness of the company’s records was undisputed, and its explanations had not been considered.
Allowing the appeal, the Tribunal set aside the appellate order and cancelled the penalties. The dispute before it concerned penalties; the ruling did not determine that the underlying transactions were universally exempt from GST or reverse charge liability.
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