The Goods and Services Tax Appellate Tribunal (GSTAT), Lucknow State Bench, has set aside a demand of ₹26.91 lakh against an iron-scrap trader, holding that a supplier being subsequently reported as non-existent cannot, by itself, establish that earlier purchases were fictitious or that the recipient fraudulently availed input tax credit.

The Bench of Santosh Kumar Srivastava (Judicial Member) and Arvind Kumar (Technical Member) found that the department had failed to produce sufficient independent and cogent evidence establishing non-receipt of goods or the trader’s participation in a fraudulent arrangement.

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The Tribunal emphasised that proceedings under Section 74 require proof of fraud, wilful misstatement or suppression of facts with intent to evade tax. An adverse investigation report concerning a supplier cannot substitute for an examination of the purchasing dealer’s transaction records. 552185mk final order_compressed

The appellant/assessee is engaged in purchasing and selling iron scrap and other goods, declared purchases worth ₹61,22,637 between October and December 2020. It availed input tax credit of ₹11,02,074, comprising CGST and SGST credit of ₹5,51,037 each.

Subsequently, the Special Investigation Branch of the State Tax Department investigated the supplier’s business premises and reported that the firm was non-existent. According to the departmental information, the supplier had issued invoices without making actual outward supplies.

On this basis, proceedings were initiated against M.K. Enterprises under Section 74 of the Uttar Pradesh GST Act, 2017.

The adjudicating authority passed an order dated June 30, 2023, confirming tax of ₹11,02,074, interest of ₹4,87,536 and an equivalent penalty of ₹11,02,074. The aggregate demand was ₹26,91,684.

The first appellate authority upheld the demand in ex parte proceedings after the trader repeatedly failed to appear despite hearing notices. The trader then approached the GSTAT.

Before the Tribunal, the trader maintained that the purchases were genuine and supported by tax invoices, e-way bills, bilties, weighing slips, books of account, GST returns and banking records.

It argued that the supplier was registered under GST when the transactions took place and that subsequent adverse findings against the supplier could not retrospectively invalidate genuine purchases.

The trader also submitted that the department had not identified any invoices or transport documents as fabricated. There was no evidence of collusion, circular trading, accommodation invoices, cash-back or return of consideration after payments through banking channels.

Regarding certain unpaid invoices, the trader explained that payment had been withheld because the supplier was under departmental investigation. It stated that the proportionate ITC had been voluntarily reversed with applicable interest after the prescribed 180-day period.

The department argued that possession of invoices, the supplier’s GST registration and reflection of transactions on the GST portal were insufficient to establish actual receipt of goods.

Relying on Section 155, it submitted that the burden of proving ITC eligibility rested on the person claiming the credit. Banking payments, according to the department, were only a supporting circumstance and could not independently prove delivery where the supplier had been found non-existent.

The department further contended that the documents referred to by the trader had not actually been attached to its portal reply and that adequate opportunities had been provided during adjudication and the first appeal.

The Tribunal acknowledged that actual receipt of goods under Section 16(2)(b) is a substantive condition for claiming ITC. However, it held that receipt must be determined by examining the totality of the evidence.

The Bench observed that tax invoices, transportation records, weighing slips, books of account, GST returns and banking payments were relevant contemporaneous documents. These could not be disregarded merely because a subsequent investigation produced an adverse report about the supplier.

It found that the impugned order did not record independent verification from the transporter, vehicle owner, weighbridge, bank or books of account that conclusively established fictitious transactions.

Once contemporaneous evidence was produced, the department was required to examine it and rebut it with cogent material.

On the burden of proof, the Tribunal observed that Section 155 could not be interpreted as requiring the recipient to conclusively establish the supplier’s entire affairs or prove matters exclusively within the supplier’s control.

The Tribunal distinguished between a supplier being found non-existent during a subsequent investigation and proof that it did not exist when the disputed supplies took place.

It held that subsequent non-existence or cancellation of registration does not automatically establish that the supplier was non-existent on the transaction dates.

The Bench relied on the Allahabad High Court’s decisions in Singhal Iron Traders, Khurja Scrap Trading Company and Safecon Lifesciences, as discussed in the order, to emphasise the need to examine the recipient’s records and the circumstances prevailing when the purchases occurred.

An investigation report could provide a basis for verification, the Tribunal explained, but could not automatically become conclusive proof against the purchasing dealer.

The Tribunal held that invoking Section 74 requires more than a finding that ITC was wrongly availed. The wrongful availment or utilisation must arise from fraud, wilful misstatement or suppression of facts with intent to evade tax.

Referring to the Allahabad High Court’s ruling in HCL Infotech Ltd., the Bench stressed that these statutory ingredients must be specifically established.

In the present case, it found no specific finding supported by independent evidence that the trader had colluded with the supplier, arranged accommodation invoices, fabricated documents, received cash-back or knowingly availed fictitious credit.

The Tribunal therefore concluded that the essential jurisdictional requirements for invoking Section 74 had not been satisfactorily established. The equivalent penalty imposed under that provision consequently could not survive.

The Bench also addressed the trader’s repeated absence during the earlier proceedings.

It held that non-appearance could justify deciding an appeal on the available record, but could not, by itself, establish that the underlying transactions were fictitious.

The authorities remained obliged to examine the evidence and determine whether the statutory conditions for invoking Section 74 were satisfied. An adverse conclusion under that provision required positive material establishing its essential ingredients.

The Tribunal recorded that the trader had voluntarily reversed proportionate ITC of ₹5,52,922, together with applicable interest, through Form GST DRC-03 dated September 7, 2026, in respect of invoices remaining unpaid beyond 180 days.

It treated this reversal as a relevant circumstance showing that the trader had addressed the statutory consequence of delayed payment under Section 16(2), read with Rule 37.

The Bench distinguished that consequence from proceedings alleging fraud under Section 74. Failure to pay certain invoices within 180 days, particularly where proportionate credit had been reversed, did not independently establish fraud, wilful misstatement or suppression.

It further observed that the trader’s claim to re-avail the reversed ITC could be considered in accordance with law if it subsequently paid the supplier the value of the supplies together with tax and fulfilled the applicable statutory conditions. The relief was therefore conditional upon compliance, rather than an unconditional restoration of the reversed credit.

The Tribunal found the transactions genuine and held that the department had not established, through cogent evidence, that the goods were not supplied or received or that the trader knowingly participated in a fraudulent arrangement.

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