Allahabad High Court Quashes GST Penalty Order Over Lack Of Evidence Of Fraudulent Intent - 2025-09-09

Allahabad High Court Quashes GST Penalty Order Over Lack Of Evidence Of Fraudulent Intent

In a significant ruling for GST-registered businesses, the High Court of Judicature at Allahabad has set aside orders denying Input Tax Credit (ITC) to a taxpayer, ruling that tax authorities cannot invoke penal provisions without definitive evidence of fraud or deliberate suppression. The judgment, delivered by Justice Piyush Agrawal, emphasizes that the burden of proving fraudulent intent lies with the revenue department.

The Dispute Over Input Tax Credit

The petitioner, M/s Safecon Lifescience Private Limited , a pharmaceutical trading firm, challenged orders passed by the Deputy Commissioner and the Additional Commissioner, State Tax. The tax authorities had denied the petitioner's ITC claim for April 2021, alleging that the supplier, M/s Unimax Pharma Chem , had its registration cancelled and had procured goods from suspicious entities that failed to deposit tax.

The petitioner maintained that all transactions were legitimate, supported by tax invoices, e-way bills, and transport bilties of M/s Vinay Road Lines Pvt. Ltd. , with all payments made through banking channels. Despite the petitioner demonstrating that the supplier had duly filed its GSTR-1 and GSTR-3B returns, the authorities disallowed the credit, relying on information from the Central Intelligence Unit in Vadodara.

Legal Arguments and Judicial Scrutiny

During the proceedings, the petitioner argued that there was no finding of fraud or wilful misstatement on their part, which is a mandatory prerequisite for initiating proceedings under Section 74 of the Uttar Pradesh Goods and Services Tax (UPGST) Act. They further contended that the authorities failed to verify the authenticity of the information received from the Central Intelligence Unit before initiating the punitive measures.

The revenue authorities, conversely, argued that since the supplier's registration had been cancelled due to suspicious purchase patterns, the petitioner was ineligible for the ITC.

The Court’s Reasoning

Justice Piyush Agrawal noted that Section 74 of the UPGST Act is a stringent provision that can only be invoked when there is evidence of "fraud, wilful-misstatement, or suppression of facts to evade tax." Citing the precedent established in M/s Khurja Scrap Trading Company vs. Additional Commissioner , the Court emphasized that mere non-payment of tax by a supplier is insufficient grounds to penalize a recipient who has acted in good faith.

The Court pointedly criticized the authorities for relying on third-party intelligence reports "with closed eyes" without conducting an independent investigation into the actual movement of goods and tax filings.

Key Observations

The judgment highlighted several critical failures in the department's approach:

• "The information sent by the Central Intelligence Unit must be verified by the authority before using the same against the registered dealer."
• " Section 74 (1) cannot be invoked merely on account of non-payment of GST without specific element of fraud or wilful misstatement or suppression of facts to evade tax."
• "Once actual movement of goods as well as payment of tax by the respondent authorities have been proved by the petitioner to which no rebuttal has been brought on record at any stage, proceedings under section 74 of the Act cannot be justified."

Final Decision and Implications

The High Court allowed the writ petition, quashing the orders dated 20.12.2022 and 12.1.2022. The ruling serves as a vital protection for businesses, reinforcing the principle that legitimate taxpayers should not be harassed for the defaults of their suppliers, especially in the absence of evidence linking the recipient to any fraudulent scheme. This judgment is expected to discourage the indiscriminate issuance of show-cause notices under the extended powers of Section 74 .