GST UPDATE

Writ Tax No.:1024 of 2026

Court: High Court of Allahabad (Lucknow Bench)

Case Title: M/s Neelkanth Entrepreneurs Private Limited Thru, its Director v. State of U.P. Thru Princ. Secretary., Department of State Tax U.P.

Outcome:Appeal was allowed

Judgement Date: 09.09.2026

BRIEF FACTS OF THE CASE:

M/s Neelkanth Entrepreneurs Private Limited (Petitioner), during the F.Y. 2025-26, sub-contracted certain portions of the works contract to 18 sub-contractors registered under GST. Petitioner was served with a show cause notice under Section 74A in which input tax credit was proposed to be denied to the petitioner and the same was proposed to be recovered along with applicable interest and penalty based on the ground that the works which were sub-contracted to the other contractors were found to be bogus and non-existent. The petitioner instead of providing reply against the same, preferred a writ against the same directly seeking two reliefs:
Quashing of the impugned show cause notice &
Declaration to the effect that Section 16(2)(c) of CGST Act are ultra vires to the Articles 14, 19(1)(g) and 300A of the Constitution of India

QUESTION BEFORE HON’BLE COURT:

Whether the impugned show cause notice is invalid due to non-compliance with the provisions of Section 61 read with Rule 99?
Whether the invocation of Section 74A(5)(ii) in the impugned notice by the department is without jurisdiction due to lack of fraud, wilful misstatement, suppression of facts?
Whether this Court ought to exercise its extra-ordinary writ jurisdiction under Article 226 of the Constitution of India to the impugned show cause notice?

BRIEF ARGUMENTS BY PETITIONER:
Petitioner submitted following contentions: -
Said sub-contractors were duly registered and active at the time of the transactions:

That the work orders issued to the sub-contractors including tax invoices raised by the sub-contractors, measurement sheets/work completion records, bank statements evidencing payments, GSTR-2A/2B invoice summaries, GST registration status documents of the sub-contractors and signed undertakings from the authorized signatories/proprietors of the sub-contractors confirming execution of the works, amounts billed, GST charged, receipt of consideration and filing of GSTR-1 and GSTR-3B returns, figures corresponds to the amounts reflected in the impugned show cause notice.
That the works/services received from the sub-contractors were utilized in the execution of its contractual obligations with government departments which were substantiated by invoices raised by the petitioner;
That the sub-contractors were duly registered and active at the time of the transactions and all those transactions were duly reflected in the returns filed by both contractor i.e. petitioner and sub-contractors. Further, the said transactions duly auto-populated in GSTR-2A.
Along with that, the payments were made through banking channels and the works were actually executed and utilized in outward supplies. No physical verification of the premises of sub-contractors was conducted nor any survey report or third-party information were furnished to the petitioner before issuance of impugned show cause notice.
Reliance placed upon by the impugned show cause notice on the supreme court judgement in the case of State of Karnataka v. M/s Ecom Gill Coffee Trading Private Limited [2023 (72) G.S.T.L. 134 (S.C.) / (2023) 4 centax 223 (S.C.)]is distinguishable as the same is applicable in the case where there is purchase of goods and not for the services.

Relief in relation to Section 16(2)(c) not pressed

With regard to the remedy sought by declaration of Section 16(2)(c) to be ultra vires, wherein the special leave petition filed in the case of Bhandari Scrap Traders v. Union of India & Ors. was dismissed by the Hon’ble Supreme Court thereby the judgement in the case Maruti Enterprises v. Union of India & Ors. was affirmed. Hence, legal counsel of the petitioner did not pressed the relief sought regarding the same.

Notice issued by bypassing the mandatory procedure under Section 61

The department officials are bound to follow Section 61 of the CGST Act and provide the petitioner an opportunity to reconcile the discrepancy or pay the differential tax before the issue of SCN. In the instant case, the said notice has been issued bypassing the statutory mechanism as provided under Section 61 of the CGST read with Rule 99(1). The scrutiny of the returns lays down the impugned show cause notice and hence, the department should have followed the provisions of Section 61. Along with that stress was placed upon the word used “shall” in Section 61 read with Rule 99(1) of the GST rules and only in those cases where the taxpayer fails to produce a satisfactory explanation, department is required to take corrective steps.

The impugned show cause notice is contrary to the scheme as provided in the act and thus suffers fundamental procedural irregularity. Reliance has been placed upon the following judicial pronouncements:

M/s Qualicum Solutions Pvt. Ltd. Kolkata V/s The Chief Commissioner of CT & GST [2025 (92) G.S.T.L. 350 (Ori.) / (2024) 24 Centax 367 (Ori.)];
Amex Services & Anr. v/s Dy. Commissioner, Sales Tax [2024 (91) G.S.T.L. 415 (Cal.) / (2024) 20 Centax 161 (Cal.)];
Goverdhandham Estate private Limited V/s State of Rajasthan & Ors[(2025) 26 Centax 400 (Raj.) / 2025 (95) G.S.T.L. 264 (Raj.)];
M/s Pepsico Indian Holdings Pvt. Ltd. V/s Union of India[;
Ramhari & Brothers V/s Joint Commissioner (State Tax), Bharatpur
Provisions of Section 74A(5)(ii) wrongly invoked
Further, that the impugned show cause notice, which has been issued under Section 74A(5)(ii) as there are no evidence produced for invoking such a grave Section 74A(5)(ii) as the entire case is based on returns and information furnished by the petitioner himself. No allegation or material demonstrating that some fraud has been committed or that some willful statement or suppression of material facts have been made with an intention to evade tax has been placed on record. Hence, the impugned SCN is wholly without jurisdiction and thus not sustainable.
Bonafide Purchaser can not be penalised before initiating recovery measures against the supplier

Department cannot penalize the Bonafide purchaser by reversing the ITC without first exhausting recovery measures against the supplier who failed to deposit the tax. Reliance was placed upon the judgement in the case of Suncraft Energy P. ltd. v. Assisstant Commissioner [2023 (77) G.S.T.L. 55 (Cal.) / (2023) 9 Centax 48 (Cal.)]that ITC cannot be automatically denied solely on the ground that there is mismatch between GSTR-2A and GSTR-3B and the department should initiate action against the defaulter supplier first.

Therefore, impugned order should be set aside.

BRIEF ARGUMENTS BY REVENUE DEPARTMENT:

Revenue Department contended that:

ASMT-10 as per Section 61 is required only where the returns have been selected for scrutiny and discrepancy has been noticed:

That the petitioner’s GST returns were never selected for scrutiny. Therefore, the mandatory procedure prescribed under Section 61 of the GST Act read with Rule 99 of the GST Rules was not applicable. According to the Respondent, these provisions operate only where the department undertakes scrutiny of returns and identifies discrepancies therein. In the present case, the Show Cause Notice was not issued pursuant to any discrepancy detected during scrutiny of the petitioner’s returns, but on the basis of the department’s finding that the petitioner had availed inadmissible ITC from firms which were not registered with the department.

That the petitioner failed to produce sufficient reasons for the maintainability of the writ petition:

Furthermore, that the interference of this court is very limited under Article 226 of the Constitution of India and the petitioner has not been able to produce any ground which requires interference. All factual and legal objections raised before the High Court could be raised in response to the Show Cause Notice and would be duly considered by the competent departmental authority.

Reliance placed on various judicial pronouncement regarding no compulsory requirement to issue ASMT-10:

That in the instant case, there was no dispute as to whether the case was picked for scrutiny or not, as in each case the department has accepted that the returns had been taken for scrutiny and as such it has been submitted. The Hon’ble courts have held that Section 61 and Rule 99 was required to be complied mandatorily. However, in the instant case, there was no requirement of any scrutiny and the department on the basis of the examination of the return formed an opinion to issue Show cause notice. Reliance was placed upon Nagarjuna Agro Chemicals (P) Ltd. v. State of U.P.[2023 (76) G.S.T.L. 333 (All.) / (2023) 9 Centax 13 (All.)]and Devi Traders v. State of Andhra Pradesh, 2023 SCC OnLine AP 1886. It was contended that these decisions support the proposition that issuance of a notice under Section 61 in which it was held that Section 61 notice was not mandatorily required for issuance of SCN under Section 74 of CGST Act.

FINDINGS & JUDGEMENT:

Following are the findings of the Hon’ble Court in the instant case:
Section 61 is not a mandatory pre-condition for issuance of notice under Section 73/74A
The Court held that Section 61 provides a pre-adjudicatory mechanism for scrutiny of returns and operates within its own limited field. Where scrutiny is undertaken and discrepancies are noticed, Rule 99 requires the prescribed procedure, including issuance of Form GST ASMT-10. However, Section 61 does not constitute the sole or exclusive route for initiating proceedings under Section 73 or Section 74A. The Department may arrive at a determination regarding short payment of tax or wrongful availment/utilisation of ITC through various sources, including audit, inspection, investigation or independent verification. Therefore, issuance of an ASMT-10 notice is not an invariable jurisdictional pre-condition for every proceeding under Section 74A.
With regards to the word used “shall” in the provisions contained in Rule 99(1), that the process of scrutiny under Section 61 in fact had already been initiated in the present case. The provisions of Rule 99 or the word “shall” comes into picture only when Section 61 has been invoked.

Reliance was placed upon the decision in the case of Devi Traders case (supra) wherein the Division bench of that court after discussing the various provisions of the GST Act held that scrutiny under Section 61 is not sine qua non i.e. not an essential condition for proceedings under Section 74 and that the proper officer may act on any material that causes tax evasion to “appear” to him. Consequently, the requirement of issuing an ASMT-10 notice under Rule 99 was held to be inapplicable.

Relied upon judgements by the Appellant were distinguished:

The judgements relied upon by the petitioner were all in whom Section 61 was invoked by the department. However, all these judgements were distinguished. In Goverdhandham Estate (P) Ltd. v. State of Rajasthan, the Court noted that scrutiny under Section 61 had been undertaken and ASMT-10 was issued. The case was therefore distinguishable, as no scrutiny under Section 61 was initiated in the present case. In M/s Pepsico India Holdings (P) Ltd. v. Union of India, the issue arose from discrepancies in the taxpayer’s own returns during scrutiny. In the present case, the SCN was based not only on the petitioner’s returns but also on the returns and records of 18 suppliers, and hence the decision was held distinguishable. In Ramhari Brothers v. Joint Commissioner, scrutiny under Section 61 had been undertaken but the prescribed notice was not served upon the assessee. Since no scrutiny was initiated under Section 61 in the present case, the decision was held inapplicable. In M/s Qualicum Solutions (P) Ltd. v. Chief Commissioner of CT & GST, Section 61 scrutiny had been initiated, but the prescribed notice/reply procedure was not followed before issuance of the Section 73 notice. The present case was distinguishable as no such scrutiny had been undertaken.

Therefore, in all these cases the Department had admittedly undertaken scrutiny under Section 61 and the proceedings under Sections 73/74 followed from discrepancies detected during such scrutiny, or the Department had failed to follow the prescribed scrutiny procedure. In contrast, no scrutiny under Section 61 had been undertaken in the present case. The Court accordingly held that those decisions did not govern the facts before it.

Hence, with regards to the point (i), the contentions of the petitioner were set aside.

Allegation of bogus/non-existent suppliers sufficient to invoke Section 74A(5)(ii) at the notice stage:
With regards to the second issue, contention of the petitioner that impugned notice suffers from a jurisdictional error with regards to the invocation of Section 74A(5)(ii) which is attracted only in the case of fraud/wilful misstatement/suppression of facts. The allegation of the SCN were bogus and non-existent and that the petitioner had availed ITC on the basis of fictitious invoices without actual movement of goods. Almost identical issue was identified in the case of Tvl. K. Ezhil Arasan, Contractor v. Joint Commissioner (ST) Intelligence, Salem reported in 2026:MHC:2274; (decided on 08.06.2026) wherein Madras High court held that expression “where it appears” permits the proper officer indicates evasion attributable to fraud, wilfil misstatement or suppression and that once the notice expressly invokes those ingredients and the allegations are traceable to connected record, statutory requirement stands satisfied at the stage of initiation. Therefore, such allegations, on their face, were capable of constituting the foundational facts necessary for invoking Section 74A(5)(ii), which deals with fraud, wilful misstatement or suppression of facts.

Truth of the allegations is a matter for adjudication
The Court drew a distinction between absence of jurisdictional facts in a Show Cause Notice and a dispute regarding the correctness of those facts. While absence of the necessary foundational ingredients may justify interference in writ jurisdiction, whether the sub-contractors were actually bogus or non-existent, or whether they were genuine and had executed the works, required examination of evidence. The Court specifically referred to work orders, measurement sheets, bank statements, GSTR-2A/2B records, undertakings of the sub-contractors and their physical existence and capacity. Such factual determination was held to fall within the domain of the adjudicating authority.

Reliance 0n the decision of Suncraft Energy is Pre Mature
According to the Court, Suncraft decision proceeded on the footing of a genuine and existing supplier who had collected tax but failed to deposit it, whereas in the instant case, the said decision shall be applicable or not shall be decided by the adjudication authorities post examination of the documents.
Writ Petition wrongly invoked
The Court also noted that the petitioner had not filed any reply to the impugned Show Cause Notice and had approached the High Court before the statutory authority had an opportunity to consider its defence. Further, the present dispute involved questions of fact requiring appreciation of evidence, therefore interference at this stage would amount to bypassing the available statutory remedy. Reliance was placed on case of Union of India v. Kunisetty Satyanarayana, reported in (2006) 12 SCC 28, State of U.P. v. Brahm Datt Sharma, reported in (1987) 2 SCC 179 : AIR 1987 SC 943, Whirlpool Corporation v. Registrar of Trade Marks, reported in (1998) 8 SCC 1 and several others.
Accordingly, z

Comments

GST update /2026-27/0091

GST UPDATE

BRIEF FACTS OF THE CASE:

QUESTION BEFORE HON’BLE COURT:

BRIEF ARGUMENTS BY REVENUE DEPARTMENT:

FINDINGS & JUDGEMENT:

Opinion

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