Allahabad High Court Quashes ITC Denial Against Safecon Lifescience Amidst Insufficient Evidence of Fraud - 2025-09-09

Allahabad High Court Quashes ITC Denial Against Safecon Lifescience Amidst Insufficient Evidence of Fraud

In a significant ruling for taxpayers, the High Court of Judicature at Allahabad has set aside orders passed by the commercial tax authorities that denied Input Tax Credit (ITC) to M/s Safecon Lifescience Private Limited. The judgment emphasizes that tax authorities cannot invoke the stringent provisions of Section 74 of the Uttar Pradesh Goods and Services Tax (UPGST) Act without concrete evidence of fraud, willful misstatement, or suppression of facts.

Disputed ITC and Administrative Action

The petitioner, a company engaged in the trading and manufacturing of pharmaceutical products, challenged orders dated December 20, 2022, and January 12, 2022. The tax authorities had initiated proceedings against Safecon Lifescience, alleging that it had wrongly claimed ITC on purchases made from M/s Unimax Pharma Chem. The primary ground for this denial was the subsequent cancellation of the supplier's GST registration and allegations that the supplier had dealt with entities that failed to pay taxes.

Arguments from the Parties

Counsel for the petitioner argued that the transaction was legitimate, fully supported by tax invoices, E-way bills, and transportation records from M/s Vinay Road Lines Pvt. Ltd. Furthermore, the petitioner highlighted that payments were made through standard banking channels and that both the petitioner and the supplier had accurately reflected the transactions in their GSTR-3B filings.

The state authorities, however, contended that since the supplier's registration was cancelled, the underlying purchase could not be verified, thus disqualifying the petitioner from claiming the associated ITC.

Legal Analysis: The Burden of Proof

Justice Piyush Agrawal, presiding over the case, observed that the authorities had failed to provide any evidence linking the petitioner to fraudulent activity. The court noted that the authorities relied on information from the Central Intelligence Unit without conducting an independent, on-the-ground verification of the facts.

Citing the circular dated December 13, 2023, the Court reiterated that Section 74 of the GST Act is a serious provision that requires clear proof of intent to evade tax. Mere discrepancies or external reports regarding a supplier’s past conduct cannot be used to penalize a registered dealer who has acted in good faith, maintained valid documentation, and processed payments through formal channels.

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." * "The record does not confirm that M/s Unimax Pharma Chem made sale only to the petitioner. It is the duty of the officers to verify facts with all angles before being used against the registered dealer." * "GST regime has been brought by the Central Government for ease of business in the country but the revenue officers are bend upon to act against the very theme/intend of it." * " Section 74 (1) cannot be invoked merely on account of non-payment of GST without specific element of fraud or wilful mis-statement or suppression of facts to evade tax."

Implications for Future Disputes

By quashing the impugned orders, the Allahabad High Court has reinforced the principle that the onus lies on the revenue department to substantiate allegations of fraud. This decision serves as a protective shield for businesses that maintain proper documentation, preventing authorities from adopting a "closed eyes" approach to enforcement and ensuring that the spirit of the "Ease of Doing Business" is preserved within the GST framework. The ruling solidifies the legal requirement that punitive actions must be supported by empirical evidence rather than mere assumptions.