Supplier’s Subsequent Cancellation Cannot Defeat Bona Fide ITC – Section 74 Invocation Requires Strict Fraud- Rules Allahabad High Court
Date & Year of Judgment
29 August 2025 (Reserved on 27.08.2025)
The judgment reinforces that ITC cannot be denied merely because the supplier was later found non-existent, and Section 74 cannot be invoked absent fraud findings.
Case Reference
M/s Khurja Scrap Trading Company vs. Additional Commissioner Grade-2 (Appeal) & AnotherWrit Tax No. 743 of 2023
Before the Allahabad High Court
1. Main Issue Involved
Whether ITC can be denied when:
The supplier was registered at the time of transaction,
Registration was cancelled subsequently,
Returns were filed and tax reflected on portal.
Whether Section 74 proceedings are sustainable without recording fraud, wilful misstatement or suppression.
The Court examined both the substantive ITC entitlement and the jurisdictional misuse of extended limitation under Section 74.
2. Sections and Rules Discussed
Section 16, CGST/UPGST Act
Section 74, UPGST Act
Rule 142(5) – DRC-07
CBIC Instruction No. 05/2023 dated 13.12.2023
Supreme Court in Suraj Impex (India) Pvt. Ltd.
Allahabad HC in Solvi Enterprises and R.T. Infotech
The Court applied the binding CBIC Instruction to restrict mechanical use of Section 74.
3. Facts of the Case
Petitioner purchased roofing sheets on 26.11.2021 and 30.11.2021.
Supplier: M/s Unique Trading Company (validly registered at that time).
Registration cancelled later on 08.04.2022.
GSTR-1/1FF and GSTR-3B filed by supplier.
Transactions reflected in GSTR-2A.
Show cause notice issued under Section 74 based on inspection that supplier was not found at business premises.
Authorities imposed tax, interest and penalty; appeal dismissed.
Proceedings were triggered by subsequent inspection findings, not by defect in transaction at the time it occurred.
4. Petitioner’s Submissions
Supplier was duly registered at time of transaction.
Payments made through banking channel.
Goods movement supported by toll plaza verification.
Returns properly filed and reflected on portal.
Section 74 requires fraud or suppression.
Relied on CBIC Instruction dated 13.12.2023 and precedents.
The defence was built around portal-based compliance and absence of mens rea.
5. Department’s Submissions
Supplier not found during inspection.
Cancellation of registration suggests bogus transaction.
Petitioner failed to prove genuineness of transport and loading expenses.
The department equated post-transaction inspection irregularity with proof of bogus transaction.
6. Analysis and Findings of the Court
A. Registration Status at Time of Transaction
The Court held:
Transactions took place before cancellation.
Supplier had uploaded GSTR-1/1FF and GSTR-3B.
Portal reflected compliance.
Once registration was valid at time of transaction, subsequent cancellation cannot automatically invalidate ITC.
The Court relied on Solvi Enterprises and R.T. Infotech.
The temporal validity of registration at transaction date is decisive for ITC entitlement.
B. Portal Architecture & Verification
The Court noted:
GSTR-1 and GSTR-3B filing was evident.
GSTR-2A reflection corroborated tax payment.
Authorities ought to have verified portal data instead of drawing adverse inference.
GST system design itself provides verification mechanism which authorities must consider before denying ITC.
C. Section 74 – Fraud Requirement
The Court referred to paragraphs 3.2 and 3.3 of CBIC Instruction No. 05/2023 dated 13.12.2023:
Section 74 can be invoked only in cases involving fraud, wilful misstatement or suppression of fact.
Mere non-payment is insufficient.
Evidence of fraud must form part of SCN.
The Court recorded:
No finding of fraud, wilful misstatement or suppression recorded at any stage.
Hence Section 74 invocation unsustainable.
Instruction No. 05/2023 operates as a substantive limitation on arbitrary Section 74 action.
D. Remand Rather than Final Relief
Unlike some cases granting outright relief, the Court:
Quashed the orders.
Remanded the matter for fresh adjudication.
This indicates that while Section 74 invocation was improper, factual reconsideration was still open.
The Court distinguished between jurisdictional defect under Section 74 and possibility of adjudication under proper provision.
7. Final Judgment / Operative Directions
Orders dated 07.10.2022 and 16.12.2022 quashed.
Matter remanded to Commercial Tax Officer for de novo consideration.
Fresh order to be passed after granting opportunity of hearing.
The Court ensured corrective process while protecting the petitioner from arbitrary Section 74 penalty proceedings.
8. Similar / Related Judgments
Safecon Lifescience Pvt. Ltd. (Allahabad HC)
Solvi Enterprises
R.T. Infotech
Tripura HC in Malaya Rub-Tech Industries
Madras HC (Madurai Bench) – Section 74 fraud requirement line of cases
A consistent High Court trend is emerging that bona fide buyers are protected and Section 74 must be strictly construed.
9. CA BTA Insights (Professional Takeaway)
This judgment is critical for ITC defence where:
Supplier’s registration cancelled after transaction.
Inspection reveals non-existence at later stage.
Portal returns confirm compliance.
Strategic Use:
Establish registration validity on transaction date.
Produce GSTR-1, GSTR-3B, 2A/2B extracts.
Cite CBIC Instruction No. 05/2023 (13.12.2023).
Demand explicit fraud finding in SCN.
Challenge mechanical invocation of Section 74.
The ruling strengthens the doctrine that GST ITC entitlement depends on bona fide transactional compliance, not subsequent administrative findings against supplier. Copy of the order is attached