Landmark Ruling by Allahabad High Court on Section 74 GST Proceedings

The Allahabad High Court has delivered a landmark ruling that restricts the arbitrary use of Section 74 GST proceedings. This ruling emphasizes that allegations of fake Input Tax Credit (ITC), circular trading, or non-existent suppliers must be backed by concrete evidence of fraud.

In M/s Raghuvansh Agro Farms Ltd. vs State of Uttar Pradesh & Ors. (Writ Tax No. 3829 of 2025, decided on 17.12.2025), the Court comprehensively addressed several critical issues:

• Wrongful invocation of Section 74

• Jurisdictional overreach by State GST authorities

• Mechanical allegations of circular trading

• Unwarranted denial of ITC despite complete documentation

• Illegal insistence on toll plaza receipts and weighbridge slips

  
  

Background of the Case

The petitioner, a private limited company, engages in trading agricultural commodities, including areca nuts. A survey was conducted in January 2019, leading to a show cause notice under Section 74 of the UPGST Act issued in April 2021. Multiple reminders and notices followed.

The petitioner submitted detailed replies with extensive documentary evidence, including:

• Tax invoices

• E-way bills

• Transport bilties

• Bank statements

• Ledger accounts

• GSTR-1, GSTR-2A, and GSTR-3B returns

  
  

Despite this comprehensive documentation, the assessment order was passed without granting an effective personal hearing. The appeal was dismissed mechanically. The department alleged:

• Circular trading

• No physical movement of goods

• Wrongful availment of ITC

  
  

Aggrieved by these actions, Raghuvansh Agro Farms approached the Allahabad High Court.

Core Legal Issues Examined by the Court

Scope and Preconditions of Section 74 GST Proceedings

Legal Position

Section 74 of the CGST/UPGST Act can only be invoked when tax short payment or ITC availment is “by reason of”:

• Fraud

• Willful misstatement

• Suppression of facts with intent to evade tax

  
  

The Court emphatically held that jurisdiction to initiate Section 74 proceedings arises only when these foundational facts are clearly alleged and supported by evidence.

Court’s Finding

The show cause notice did not specify:

• What constituted fraud

• Which statement was willfully false

• What fact was suppressed

  
  

The assessment order merely reproduced allegations without analysis. The absence of foundational ingredients renders Section 74 proceedings void ab initio.

Circular Trading Allegations Cannot Be Based on Presumptions

Department’s Stand

The department alleged that the transactions entered into by the petitioner were not genuine. They claimed there was no actual physical movement of goods and that the petitioner was engaged in circular trading. They argued that the transactions were merely paper arrangements devised to wrongfully avail input tax credit.

Evidence on Record

In response, the petitioner provided a complete set of statutory and commercial documents demonstrating the genuineness of the transactions and actual movement of goods. This included:

• Valid tax invoices

• E-way bills

• Transport documents (bilties)

• Proof of payments made through banking channels

• GST returns reflecting matching entries in GSTR-1, GSTR-2A, and GSTR-3B

  
  

Court’s Ruling

The Allahabad High Court categorically rejected the department’s approach. The Court held that mere suspicion, however strong, cannot replace legal proof. Once statutory documents exist, are duly maintained, and are verifiable on the GST portal, the initial burden stands discharged by the taxpayer. The burden then shifts to the department to disprove the genuineness of the transactions through cogent, positive, and admissible evidence. Allegations of circular trading must be established through proper investigation and evidentiary material, not conjectures or assumptions.

No Legal Requirement to Produce Toll Plaza Receipts

A significant aspect of the judgment is the Court’s clear rejection of compliance requirements that lack statutory basis under the GST law. The High Court specifically noted that neither the CGST Act nor the UPGST Act, nor the Rules framed thereunder, require the production of toll plaza receipts or weighbridge slips as proof of movement of goods. The Court held that the department's insistence on such documents was “patently perverse and without any basis.” Where the taxpayer has produced e-way bills, transport documents, and evidence of payments made through banking channels, actual physical movement of goods cannot be doubted merely because toll plaza receipts were not furnished.

Effect of Proceedings Against Supplier Being Dropped

One of the suppliers, M/s Sibri Traders, had proceedings set aside by CGST Anti-Evasion authorities. The Court held that once proceedings against the supplier are dropped, the buyer cannot be penalized on identical allegations. This reinforces the principle that ITC cannot be denied retrospectively, and the buyer cannot be punished for departmental inconsistencies.

Jurisdictional Overreach by State GST Authorities

The petitioner fell under Central GST jurisdiction, yet proceedings were initiated by State GST officers.

Court’s Finding

No cross-empowerment notification existed, and the State failed to justify its jurisdiction. The entire proceedings were held without authority of law, which was sufficient to vitiate the proceedings.

Reliance on Supreme Court Judgment in Ecom Gill Coffee Distinguished

The department relied on State of Karnataka vs Ecom Gill Coffee Trading Pvt. Ltd. The Court clarified that in Ecom Gill Coffee, the movement of goods itself was disproved. In the present case, movement was supported by documents, payments were through banks, and returns were matched. Judgments cannot be applied mechanically without factual parity.

Final Verdict of the High Court

The Court:

• Quashed assessment and appellate orders

• Declared Section 74 GST proceedings unsustainable

• Ordered the refund of amounts deposited

• Reinforced the binding nature of the CBIC Circular dated 13.12.2023

  
  

How This Judgment Helps Taxpayers and Professionals

This judgment significantly strengthens the position of taxpayers. It provides a robust defense against arbitrary initiation of Section 74 GST proceedings, especially where show cause notices fail to clearly allege or establish fraud, willful misstatement, or suppression of facts. It reinforces the principle that genuine input tax credit cannot be denied due to alleged deficiencies or subsequent issues at the supplier’s end, provided the statutory conditions prescribed under Section 16 of the GST Act are fulfilled.

The ruling also places clear limits on departmental discretion. Tax authorities cannot impose extra-statutory compliance requirements, disregard valid documentary evidence, or shift the burden of proof onto the taxpayer without substantiating their allegations. Importantly, the Court reaffirmed that proceedings initiated by an authority lacking jurisdiction are inherently void and constitute a substantive illegality, rather than a curable procedural defect.

Conclusion

The Raghuvansh Agro Farms judgment is a strong reaffirmation of the rule of law in GST administration. It sends a clear message that Section 74 GST proceedings are not a default option but an exception requiring strict proof. For professionals and businesses alike, this ruling provides a robust precedent to counter unjust ITC reversals and penalty demands.

This ruling is a testament to the importance of maintaining rigorous standards of evidence in tax proceedings, ensuring that businesses can operate with confidence in their compliance efforts.