GST Act | Scrutiny Of Returns Under S. 61 Not A Precondition For Show Cause Notice Under S. 74A: Allahabad High Court

The Allahabad High Court has held that scrutiny of returns under Section 61 of the Central Goods and Services Tax Act, 2017 read with Rule 99 of the CGST Rules, 2017, is not a mandatory step before the department issues a show cause notice under Section 74A of the Act.

It held that where the notice rests on independent verification and not merely on discrepancies in the assessee's own returns, the department need not first call for the assessee's explanation under Section 61.

The bench of Justice Shekhar B. Saraf and Justice Abdhesh Kumar Chaudhary held

“Section 61 is not, as a matter of law, an invariable jurisdictional precondition to issuance of every Section 74A notice; but where the proper officer in fact possesses only return-based discrepancy material and no independent source of information, compliance with Section 61 and Rule 99 may be a mandatory procedural safeguard, non-compliance of which may expose the resultant Section 74A proceedings to challenge on ground of jurisdiction or breach of the statutory scheme or principles of natural justice.”

Petitioner, a private limited company, carries out sub-contract works for NCC Limited. For the Financial Year 2025-26, it sub-contracted parts of these works to registered sub-contractors. By a show cause notice dated 09.07.2026 issued under Section 74A(1) of the CGST Act, the Deputy Commissioner, State Tax proposed to deny the Input Tax Credit availed by the petitioner along with tax, interest and penalty, alleging that the sub-contracted works were bogus and the sub-contractors non-existent.

Without replying to the notice, the petitioner approached the High Court. It was pleaded that the sub-contractors were registered and active, payments were made through banks and the works were actually executed. It was argued that since the notice was founded on the petitioner's returns, the department was bound under Section 61 and Rule 99, which use the word “shall”, to first give the petitioner an opportunity to explain the discrepancy.

It was further argued that Section 74A(5)(ii), which applies to cases of fraud, wilful misstatement or suppression of facts, had been invoked without any such allegation.

Counsel for the State submitted that the petitioner's returns were never picked for scrutiny and the notice was based not on any discrepancy in them but on credit availed from firms not registered with the department.

The Court observed that Section 61 is a verification exercise which does not by itself determine any demand, and no recovery can follow from it alone. It held that Sections 73 and 74A operate independently and may be triggered by material from several sources, including audit, inspection or, as in the present case, independent verification of the suppliers from whom credit was claimed. It held

“Section 61 and Section 74A lacks commutative property, as Section 61 may lead to Section 74A but the reverse is not true.”

Noting that Section 74A(1), like Section 74(1), opens with the words “where it appears to the proper officer”, the Court held

“The word “appears” has a wider amplitude subsuming in it not only Section 61 or 65/66/67 but also any other credible information from a different source.”

The Court held that the word “shall” in Rule 99 comes into play only once scrutiny under Section 61 has begun, which had not happened in the present case.

It relied on the co-ordinate bench decision in Nagarjuna Agro Chemicals (P) Ltd. v. State of U.P., which held that a notice under Section 61 is not a precondition for proceedings under Section 74.

On Section 74A(5)(ii), the Court held that an allegation that the sub-contracts and invoices were built around fictitious firms is, on its face, an allegation of fraudulent availment of credit. Whether the sub-contractors were in fact bogus, it held, is a question of evidence for the adjudicating authority.

“The existence of a jurisdictional fact is not the same as the truth or otherwise of that fact once alleged with sufficient particulars.”

Noting that none of the exceptions laid down in Whirlpool Corporation v. Registrar of Trade Marks was made out and that the petitioner had not replied to the notice, the Court declined to interfere at the show cause stage. It kept open the petitioner's reliance on Suncraft Energy P. Ltd. v. Asstt. Commr., S.T., which dealt with a genuine supplier who collected tax but did not deposit it, for the adjudicating authority to examine.

Accordingly, the writ petition was dismissed. The petitioner was granted four weeks to file a reply to the show cause notice, which the adjudicating authority is to decide on merits, uninfluenced by the Court's observations and after hearing the petitioner.

For Petitioner: Advocates Manish Misra, Abhinav Kumar, Mathur, Dileep Pandey

For Respondent: Advocates Sanjay Sarin