Pavithram Gold & Diamonds v. Commissioner of CGST & Central Excise, Thiruvananthapuram

GST update /2026-27/0105

GST UPDATE

Question before Hon’ble Authority:

Whether penalty under Section 74 of the CGST Act, 2017 can be sustained merely because input tax credit was not reversed for non-payment to suppliers within 180 days, without specifically establishing fraud, wilful misstatement or suppression of facts in the show cause notice.

Hon’ble Authority: GSTAT, Thiruvananthapuram

Case Title Pavithram Gold & Diamonds v. Commissioner of CGST & Central Excise, Thiruvananthapuram

Appeal No. & Citation Final Order No. 10/TVP/KERALAM/2026

Date of Order 8 October 2026

Outcome Appeal Allowed

Brief Facts of the Case

M/s Pavithram Gold & Diamonds, the appellant, was subjected to an audit under Section 65 of the CGST Act, 2017 for the period January 2019 to March 2021. During the audit, the department observed that the Noticee had failed to pay the amount to its suppliers within the prescribed period of 180 days. A show cause notice was issued. The adjudicating authority confirmed the tax demand along with interest and an equivalent penalty under Section 74(1). The appellant challenged the order before the first appellate authority; however, the appeal was rejected. Thereafter, the appellant approached the GSTAT, Thiruvananthapuram. The appellant did not contest the tax and interest liability before the Tribunal; the dispute was confined to the sustainability of the penalty imposed under Section 74 of the CGST Act

Brief Arguments by Appellant

The appellant contended that the previous authorities had failed to consider the agreement between the firms owned by the husband and wife, which was relevant to the dispute. It was further submitted that the invocation of Section 74(1) was unsustainable because the department had not established fraud, wilful misstatement or suppression of facts with an intention to evade payment of tax.

The appellant also informed the Tribunal that part of the interest had already been paid and requested permission to discharge the remaining interest in instalments.

Brief Arguments by Respondent

The Revenue argued that Rule 37 of the CGST Rules as applicable during the relevant period, required the taxpayer to report the proportionate input tax credit attributable to the value of supplies remaining unpaid beyond 180 days. Since the appellant had not paid the suppliers within the prescribed period, it was required to reverse the proportionate credit and discharge the corresponding tax liability along with interest.

The Revenue further relied on Explanation 2 to Section 74 of the CGST Act, which defines suppression to include non-declaration of facts or information required to be declared in a return, statement, report or other prescribed document, as well as failure to furnish information when called for in writing by the proper officer.

It was contended that the appellant had complete knowledge of its inward supplies and payments but had failed to report the ineligible credit in its statutory returns and pay the corresponding amount with interest. According to the Revenue, this failure constituted suppression of facts and justified the demand under Section 74, together with an equivalent penalty.

Findings and Judgement

• Mere contravention of Section 16(2) does not automatically attract penalty under Section 74

The Tribunal observed that the show cause notice alleged that the appellant had wilfully suppressed material facts with an intention to evade payment of tax because it had failed to reverse the proportionate input tax credit relating to supplies remaining unpaid beyond 180 days. However, the notice did not identify the specific material facts that had allegedly been suppressed.

The Tribunal further noted an inconsistency within the show cause notice itself. While one paragraph invoked Section 74 for the alleged contravention of Section 16(2), another paragraph referred to Section 73 for another allegation involving contravention of the same provision. Tribunal held that the show cause notice in the present case was vague, lacked specific details and failed to clearly establish the basis for invoking Section 74. Reliance was placed upon the Supreme Court judgement in Commissioner of Central Excise v. Brindavan Beverages (P) Ltd. & Ors., (2007) 5 SCC 388, wherein it was held that the show cause notice forms the foundation of the department's case. If the allegations are vague, lack necessary particulars or are unintelligible, the noticee is deprived of a proper opportunity to defend itself.

• Detection of a contravention during audit does not automatically establish wilful suppression

The Tribunal rejected the contention of th department that wilful suppression could be inferred merely because the contravention had been detected during an audit under Section 65 of the CGST Act.

In that case, every contravention discovered through audit would automatically become a case for invoking Section 74. Such a proposition was legally untenable.

• The burden of proving wilful suppression rests upon the Revenue

The Tribunal clarified that, in the absence of a specific statutory provision to the contrary, the burden of proving the allegation rested upon the Revenue. In the present case, the department had not produced the necessary evidence to establish wilful suppression. Accordingly, the allegation could not be sustained merely because the appellant had failed to disprove it. In the instant case, The Tribunal examined the finding of the first appellate authority that the ingredients of suppression existed because the appellant had not disclosed the relevant information in its returns. However, explanation 2 to section 74 of the CGST Act, needs "deliberate non-disclosure".

The Tribunal held that a legally sustainable finding of suppression must specifically establish:

1. The non-declaration of specific facts / information.

2. What was the return / statement / report / document wherein the appellant was mandated to provide this information and the provisions of the Act / Rules thereof.

Since the appellate order did not identify these particulars or establish the basis of suppression in accordance with the statutory definition, the finding of wilful suppression was held to be legally unsustainable.

• The department cannot improve a defective show cause notice through subsequent arguments

The Tribunal observed that the grounds relied upon during the second appeal were not part of the show cause notice or the orders passed by the lower authorities. The Tribunal held that deficiencies in the original proceedings cannot be cured by introducing new allegations or arguments at a later stage. In support of this principle, the Tribunal relied upon the Supreme Court's judgment in M/s G.R. Infra Projects Limited, Ratlam v. State of Madhya Pradesh & Ors., dated 19 August 2026, reported as 2026 (8) TMI 1497 – SC.

Accordingly, the Tribunal allowed the appeal with respect to the penalty.

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