Allahabad High Court Limits Section 74 GST Proceedings in Landmark Ruling

The Allahabad High Court has delivered yet another landmark ruling restricting the arbitrary use of Section 74 GST proceedings, reinforcing that allegations of fake 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 has comprehensively dealt with:

• 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 is a private limited company engaged in trading of agricultural commodities, including areca nuts.

• A survey was conducted in January 2019, based on which:

  • A show cause notice under Section 74 of the UPGST Act was 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:

• Assessment order was passed without granting effective personal hearing

• 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 be invoked only 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:

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

Absence of foundational ingredients renders Section 74 proceedings void ab initio

Circular Trading Allegations Cannot Be Based on Presumptions

Department’s Stand

The department proceeded on the allegation that the transactions entered into by the petitioner were not genuine in nature. It was alleged that there was no actual physical movement of goods, that the petitioner was engaged in circular trading, and that the transactions were mere paper arrangements devised to wrongfully avail input tax credit.

• No actual movement of goods

• Circular trading

• Transactions merely on paper

Evidence on Record

In response, the petitioner placed on record a complete set of statutory and commercial documents demonstrating the genuineness of the transactions and actual movement of goods.

• 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 and held that mere suspicion, howsoever strong, cannot take the place of legal proof. The Court observed that once statutory documents exist, are duly maintained, and are verifiable on the GST portal, the initial burden stands discharged by the taxpayer. Thereafter, the burden shifts squarely upon the department to disprove the genuineness of the transactions through cogent, positive, and admissible evidence. The Court further held that allegations of circular trading must be established through proper investigation and evidentiary material, and cannot be sustained on conjectures, assumptions, or presumptions.

No Legal Requirement to Produce Toll Plaza Receipts

A significant aspect of the judgment is the Court’s clear rejection of compliance requirements that have no statutory basis under the GST law. The High Court specifically observed that neither the CGST Act nor the UPGST Act, nor the Rules framed thereunder, prescribe any requirement for production of toll plaza receipts or weighbridge slips as proof of movement of goods. The Court categorically held that the reasoning adopted by the department in insisting upon such documents was “patently perverse and without any basis”, as no such obligation flows from the statute. It was further observed that where the taxpayer has produced e-way bills, transport documents and evidence of payments made through banking channels, and such transactions are duly reflected in the statutory GST returns, actual physical movement of goods cannot be doubted merely on the ground that 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:

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

• 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

• State failed to justify jurisdiction

Entire proceedings were held without authority of law

This finding alone 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:

• In Ecom Gill Coffee, movement of goods itself was disproved

• In the present case:

  • Movement was supported by documents

  • Payments were through banks

  • 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 refund of amounts deposited

✔ Reinforced binding nature of CBIC Circular dated 13.12.2023

How This Judgment Helps Taxpayers and Professionals

This judgment significantly strengthens the position of taxpayers by providing a robust defence against arbitrary initiation of Section 74 GST proceedings, especially where show cause notices fail to clearly allege or establish fraud, wilful misstatement, or suppression of facts. It reinforces the principle that genuine input tax credit cannot be denied merely 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 duly fulfilled. The ruling also places clear limits on departmental discretion by holding that 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 has 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 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.