Facts of the Case:

In this case, the appellant was subjected to GST audit under Section 65 of the CGST Act for the period July 2017 to March 2020. Three issues were identified during audit, namely, excess ITC availed in GSTR-3B vis-à-vis GSTR-2A, ineligible ITC under Section 17(5), and irregular transitional credit claimed through TRAN-1. The aggregate audit objection was ₹19,28,456. In respect of the liabilities accepted by the appellant, tax of ₹7,78,693 and applicable interest of ₹5,77,235 were voluntarily discharged through Form GST DRC-03 in June and July 2022, before issuance of the SCN. The audit report was thereafter finalized and an SCN dated 25.01.2023 was issued invoking Section 74 and proposing tax, interest and penalty.

The Adjudicating Authority, vide Order-in-Original dated 12.06.2023, confirmed the agreed tax and interest. However, it specifically found that the ingredients for invoking Section 74 were not established in respect of Issues 1 and 3, and consequently dropped the Section 74 penalty on those issues. The penalty relating to Issue 2 was confirmed and the appellant paid the reduced penalty. The Revenue challenged the dropping of penalty for Issues 1 and 3 before the First Appellate Authority. The First Appellate Authority allowed the Revenue’s appeal vide Order-in-Appeal dated 01.10.2024, taking the view that once the SCN had been issued under Section 74 and the tax liability was confirmed, the corresponding Section 74 penalty was required to follow. The appellant therefore approached the GSTAT.

The appellant also raised a preliminary objection alleging institutional bias before the First Appellate Authority, since the Revenue appeal had been instituted pursuant to a review/authorisation order passed by the Commissioner. The GSTAT considered this objection separately before examining the substantive question concerning Section 74.

Issue:

Whether Section 74 penalty could be imposed merely because the ITC discrepancies had been detected during departmental audit and the SCN had been issued under Section 74, in the absence of independent evidence establishing fraud, wilful misstatement or suppression of facts with intent to evade tax. Whether the tax and interest voluntarily paid before issuance of the SCN were liable to be treated as payment under Section 73(5), and whether the Revenue’s statutory review/authorisation order gave rise to a reasonable apprehension of bias before the First Appellate Authority.

Held That:

The GSTAT held as under- 

A. Section 74 requires independent satisfaction regarding fraud, wilful misstatement or suppression

The GSTAT held that issuance of an SCN under Section 74 does not automatically make the taxpayer liable to Section 74 penalty. Section 74 can be invoked only when the statutory ingredients of fraud, wilful misstatement or suppression of facts with intent to evade tax are established. The adjudicating authority is required to arrive at an independent satisfaction regarding the requisite mens rea; it cannot proceed on the assumption that confirmation of the tax demand under Section 74 necessarily entails imposition of the penalty.

B. Audit detection by itself does not amount to suppression

The GSTAT following the principles of the Supreme Court in M/s Tata Steel Ltd. v. Union of India & Ors., 2026 INSC 920, the Tribunal held that the expressions “suppression”, “wilful misstatement” or “fraud” cannot be invoked mechanically without establishing the underlying foundational facts. In the present case, the relevant particulars were available in the statutory records, including GSTR-3B, GSTR-2A and TRAN-1. Therefore, the mere fact that the discrepancy came to light during audit could not establish a deliberate act of suppression with intent to evade tax. The Tribunal specifically held that the finding that the contravention would have continued “but for the audit verification” misconstrued the legal requirement of suppression.

The Tribunal also relied upon Anand Nishikawa Co. Ltd. v. CCE, 2005 (188) ELT 149 (SC), observing that where the relevant facts are already known to the Department or are accessible through statutory records, non-disclosure of such facts cannot, by itself, amount to suppression.

C. Pre-SCN payment falls within the mechanism of Section 73(5)

The GSTAT further held that the appellant had voluntarily discharged the agreed tax and interest before issuance of the SCN. In the absence of deliberate evasion and where the ingredients of Section 74 were not established, such payment was required to be treated within the statutory framework of Section 73(5). The Tribunal consequently held that the tax and interest paid in respect of Issues 1 and 3 could not be subjected to Section 74 penalty merely because the Department had chosen to issue the SCN under Section 74.

D. No institutional bias merely because Revenue appeal followed Commissioner’s review

The Tribunal rejected the challenge based on institutional bias. It held that the Commissioner’s review/authorisation for filing a Revenue appeal is an administrative step and does not constitute a binding judicial determination on the merits. The fact that the appellate authority is part of the same statutory departmental hierarchy does not, by itself, establish a “real danger of bias”.

E. Final Order

The GSTAT allowed the appeal, set aside Order-in-Appeal dated 01.10.2024 and held that the Section 74 penalties imposed on Issues 1 and 3 were unsustainable. It further held that the credit reversed and interest paid in respect of those issues were payments under Section 73(5) of the CGST Act.

Case Name: CONDUENT BUSINESS SERVICES INDIA LLP Versus COMMISSIONER OF CENTRAL TAX BENGALURU EAST GST COMMISSIONERATE dated 15.09.2026

Citation No.  2026 Taxo.online 2870