Allahabad HC Declines to Quash GST SCN, Directs Department to Share Evidence with Taxpayer

The Allahabad High Court has refused to step in at a preliminary stage in a case where the GST department issued a show-cause notice under section 74 of the Uttar Pradesh Goods and Services Tax Act, 2017, accusing a taxpayer of wrongly claiming input tax credit (ITC) through fraud.

However, the Court made it clear that before the GST authorities move ahead with passing any final order, they must share all the material they are relying on with the taxpayer. This includes documents, statements, and any other evidence used to make the allegations.

The bench of Justice Saumitra Dayal Singh and Justice Vivek Saran said that the tax authority relied on information given by the DGGI about four transactions that were suspected to involve fake invoices and, on that basis, formed an initial opinion that something was wrong. The judges clarified that whether this initial opinion is actually correct or not can still be examined later during writ proceedings. However, they did not interfere right now because the opinion was formed without hearing the affected party.

The impugned notice was issued in a routine, careless manner without properly checking whether the legal conditions needed under Section 74 of the GST law were actually met. All business transactions with the supplier, M/s Maa Kamakhaya Trading, which is a registered firm in Chhattisgarh, were genuine. These transactions were backed by proper tax invoices and e-way bills, and all payments were made through normal banking channels, not in cash.

Earlier, the department had already stopped the company from claiming ITC on the same grounds. The company challenged this in the High Court, and the Court set aside the same action. However, the Court allowed the department to start fresh proceedings, but only by following proper legal procedure. According to the applicant, instead of following the correct legal process, the authorities rushed and issued the present show-cause notice without due care.

The State argued that the appeal should be dismissed because the dispute is based on facts, and such factual issues cannot be decided by the court at the notice stage under writ jurisdiction. The show cause notice (SCN) was issued based on information received from the Directorate General of GST Intelligence (DGGI), which indicated that the invoices used by the applicant were fake and that input tax credit (ITC) had been wrongly and fraudulently claimed. The Standing Counsel submitted that since these allegations require a detailed examination of evidence, the court should not interfere at this preliminary stage.

The State said that the authority had already carefully looked at the evidence and formed an initial view that fraud might have been committed. Because of this, it was reasonable and lawful for the authority to issue a notice under Section 74.

HC said that a notice under Section 74 can be issued only when there are serious issues like fraud, deliberate false statements, or hiding important facts. This means that at the time of issuing the notice itself, the tax authority must already form a prima facie subjective opinion, grounded on available material, that such wrongdoing may have happened. They cannot issue the notice casually or just to investigate later; there must be some foundation for it from the start.

The Court did not cancel the show cause notice and said that before the tax authority takes any further action, it must first show the taxpayer all the documents, evidence, and statements that are being used against them. Additionally, if any statements were recorded earlier without the taxpayer being present or aware of them, those statements must also be shared with the taxpayer.