Library / Goods and Services Tax: The Professional's Master Guide
56. Case Study 12: Show Cause Notice under Section 74A
56.1 Facts
Rohit Synthetics Pvt. Ltd., Surat, received a show cause notice on 15 July 2026 under section 74A for FY 2024-25, alleging fraud and suppression. The notice proposes:
Allegation | IGST | CGST | SGST | Total |
|---|---|---|---|---|
(a) ITC in GSTR-3B more than GSTR-2B (September 2024 return, filed 20 October 2024) | 0 | 4,00,000 | 4,00,000 | 8,00,000 |
(b) ITC from a supplier whose registration was cancelled from inception (December 2024 return, filed 20 January 2025) | 12,00,000 | 0 | 0 | 12,00,000 |
Total tax proposed | 12,00,000 | 4,00,000 | 4,00,000 | 20,00,000 |
The credit was used in the month it was taken. Rohit's own review shows that Rs. 6,00,000 of (a) relates to invoices uploaded late by suppliers, which appear in GSTR-2B of later months of FY 2024-25 and April and May 2025. Rs. 2,00,000 (CGST Rs. 1,00,000, SGST Rs. 1,00,000) relates to a supplier who never filed. For (b), Rohit holds e-way bills, lorry receipts, weighbridge slips, stock entries and bank payments.
56.2 Issues
- Time limits under section 74A.
- Tax, interest and penalty under each payment option.
- Reply strategy, and appeal with pre-deposit.
56.3 Analysis and computation
Section 74A covers FY 2024-25 onwards. The due date of the annual return for FY 2024-25 was 31 December 2025, so a notice can issue up to 30 June 2029 (42 months), and the order must follow within 12 months of the notice, extendable by six months. The notice is in time. Penalty depends on whether the case is one of fraud or wilful misstatement or suppression: 10% of tax (minimum Rs. 10,000) in other cases, nil if tax and interest are paid within 60 days of the notice; 100% of tax in fraud cases, reduced to 15% if paid before notice, 25% if paid within 60 days of notice and 50% if paid within 60 days of the order.
Interest under section 50(3) at 18% runs from the date of utilisation to the date of payment. For payment on 10 September 2026 (within 60 days of notice, which end on 13 September): 690 days for (a) and 598 days for (b). For payment on 20 August 2027 (within 60 days of an order dated 30 June 2027): 1,034 and 942 days.
Option | Tax | Interest | Penalty | Total outflow |
|---|---|---|---|---|
Fraud limb, pay by 10 Sep 2026 (25%) | 20,00,000 | 6,26,105 | 5,00,000 | 31,26,105 |
Fraud limb, pay by 20 Aug 2027 (50%) | 20,00,000 | 9,65,392 | 10,00,000 | 39,65,392 |
Non-fraud limb, pay by 10 Sep 2026 | 20,00,000 | 6,26,105 | 0 | 26,26,105 |
Non-fraud limb, order, not paid in 60 days | 20,00,000 | to date of payment | 2,00,000 | Tax + interest + 2,00,000 |
Illustration 224: Interest working for the first option Step 1: (a) CGST 4,00,000 x 18% x 690 / 365 = Rs. 1,36,110; SGST the same. Total Rs. 2,72,220. Step 2: (b) IGST 12,00,000 x 18% x 598 / 365 = Rs. 3,53,885. Step 3: Total interest Rs. 6,26,105. |
Reply strategy. Paying the whole amount would give up a good defence on most of it. The recommended course is:
- Pay the admitted Rs. 2,00,000 of (a) with interest of Rs. 68,054 (CGST and SGST Rs. 34,027 each) through DRC-03 before 13 September 2026, and ask that proceedings for that part be concluded without penalty. A supplier's failure to file is not fraud by the recipient; the non-fraud limb applies and the penalty is nil.
- For the Rs. 6,00,000 in (a), file a reconciliation showing each invoice in GSTR-2B of a later month within the section 16(4) time limit. The mismatch is one of timing, not an ineligible claim.
- For (b), show that goods were received and paid for through the bank, with transport and stock evidence. Deny the fraud allegation: suppression means deliberate withholding of facts, and Rohit disclosed the credit in its returns.
- Ask for a personal hearing and for the material relied on, including any statement of the supplier.
Judicial view: Burden of proof and supplier default State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd. (Supreme Court, 2023): Under the Karnataka VAT Act, the Court held that the dealer claiming credit must prove the actual purchase and receipt of goods; invoices and payment by cheque alone are not enough. The same burden lies on a recipient under section 155 of the CGST Act, so transport and stock evidence matters. Bhandari Scrap Traders v. Union of India (Supreme Court, 2026): The Court dismissed the challenge to section 16(2)(c) and affirmed the Gujarat High Court. Credit can be denied where the supplier has not paid the tax, with restoration when the supplier pays. A recipient cannot rely on the earlier reading down by some High Courts. Pushpam Pharmaceuticals Co. v. Collector of Central Excise (Supreme Court, 1995): Suppression means deliberate withholding of information to evade tax, not mere omission. This supports the argument against the fraud limb where the facts were in the returns. |
Illustration 225: Appeal and pre-deposit Step 1: Suppose the order of 30 June 2027 drops the Rs. 6,00,000 in (a), accepts the payment of Rs. 2,00,000 and confirms (b): IGST Rs. 12,00,000 with interest and a penalty of Rs. 12,00,000. Step 2: First appeal under section 107 within three months: pre-deposit of 10% of the disputed tax = Rs. 1,20,000 (IGST). Recovery of the rest is stayed. Step 3: If the appeal fails, appeal to GSTAT under section 112 within three months: further 10% of the tax remaining in dispute = Rs. 1,20,000. Total pre-deposit Rs. 2,40,000. Step 4: Pre-deposits are refunded with interest if the appeal succeeds. |
56.4 Compliance and documentation
- Reply in DRC-06 within the time allowed in the notice, with reconciliation, invoices and transport evidence.
- Admitted tax paid through DRC-03 with a clear reference to the notice.
- Appeal in APL-01 with pre-deposit; appeal to GSTAT in the prescribed form, filed electronically.
- Rohit should reconcile GSTR-2B with GSTR-3B monthly so that credit is taken only when the invoice appears.
Key point Lessons Separate timing mismatches from genuine defaults before replying. Pay what is admitted within 60 days. Fight the fraud allegation on facts: disclosure in returns weighs against suppression. For credit from a cancelled supplier, the recipient must prove the transaction; keep transport and stock records for every purchase. |
Chapter summary • Section 74A applies from FY 2024-25 with a 42-month notice limit. • Paying everything within 60 days on the fraud limb would cost Rs. 31,26,105. • Paying the admitted Rs. 2,00,000 with interest of Rs. 68,054 and contesting the rest is the better course. • Pre-deposit on appeal for the IGST dispute would total Rs. 2,40,000 across both levels. |
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