Input Tax Credit Challenges and Notices under Section 74/74A of the CGST Act, 2017

The GST framework in India aims to streamline the taxation system while ensuring a seamless flow of ITC for registered taxpayers. Section 16 of the CGST Act, 2017, prescribes conditions for availing ITC. At the same time, Section 74 of the Act empowers tax authorities to issue SCN (pertaining to the period up to Financial Year 2023-24) in cases where ITC is alleged to be wrongly availed due to fraud, willful misstatement, or suppression of facts, and the newly inserted Section 74A empowers tax authorities to issue SCNs (for the period from Financial Year 2024-25 onwards) irrespective of the fact whether the case involves fraud, willful misstatement, or suppression of facts.

However, notices have been received by registered persons u/s 74 of the CGST Act (pertaining to the period up to Financial Year 2023-24) even after fully complying with all statutory requirements. A major concern arises when ITC is denied solely on the grounds of the supplier’s non-compliance, such as failure to pay tax or retrospective cancellation of their GST registration.

Recently, there has been a significant increase in the issuance of notices under Section 74 of the CGST Act, 2017, (pertaining to the period up to Financial Year 2023-24) targeting registered persons alleged to have wrongly availed ITC. These notices are frequently issued based on the grounds that ITC claims contravened the conditions prescribed under Section 16 of the CGST Act, 2017, particularly in cases involving the absence of actual receipt of goods.

Section 74 of the GST Act, 2017, addresses the determination of tax not paid, short-paid, erroneously refunded, or input tax credit wrongly availed due to fraud, willful misstatement, or suppression of facts. It mandates that the proper officer issues a notice to the taxpayer, requiring them to explain why they should not pay the specified tax, interest, and penalties. Consequently, even bona fide recipients who have fulfilled their obligations, such as possessing valid tax invoices and making payments through proper banking channels, are being held accountable for defaults committed by their suppliers. This has led to growing legal and procedural challenges for businesses defending their legitimate ITC claims.

Section 74A of the CGST Act, 2017, introduced for issuance of SCN for the period from Financial Year 2024–25 onwards, empowers the proper officer to initiate proceedings in cases where any tax has not been paid, has been short paid, has been erroneously refunded, or where Input Tax Credit (ITC) has been wrongly availed or utilized, for any reason, irrespective of whether such non-compliance is due to fraud, willful misstatement, or suppression of facts. Under this provision, if such a discrepancy is noticed, the officer is authorized to issue a Show Cause Notice (SCN) to the concerned person, requiring them to explain why the specified amount of tax, along with interest under Section 50 and applicable penalty, should not be recovered. This provision significantly broadens the scope of tax recovery, allowing action in cases other than fraudulent intent, thereby placing a greater compliance responsibility on taxpayers including genuine recipients of supplies who may be impacted by supplier’s defaults.

Key Conditions for Availing ITC under Section 16 of the CGST Act, 2017

To understand these challenges, it is essential to analyse the key conditions under Section 16 of the CGST Act, 2017, which govern the entitlement of ITC to registered persons for goods or services used in the course or furtherance of business. These conditions form the basis for scrutinizing ITC claims:

• Possession of a Valid Tax Invoice or Prescribed Document The recipient of goods or services must be in possession of a valid tax invoice, debit note, or any other prescribed document issued by a registered supplier in accordance with Section 31 of the CGST Act and Rule 36 of the Central Goods and Services Tax Rules, 2017 (CGST Rules). The document must clearly reflect all requisite particulars such as the GSTIN of the supplier and recipient, description of goods/services, value, tax rate, and amount of tax charged.
• Actual Receipt of Goods or Services ITC can only be claimed when the recipient has received the goods or services.
• GST has been paid to the Government by the Supplier One of the key conditions under Section 16(2)(c) of the CGST Act mandates that the tax charged on the supply must have been actually paid to the government, either in cash or through the utilization of input tax credit by the supplier, thereby ensuring that input tax credit is availed only against tax-compliant transactions and contributing to the prevention of revenue leakage and the promotion of compliance within the GST framework.
• Filing of Return Under Section 39 The recipient must furnish a return under Section 39 of the CGST Act. ITC cannot be claimed unless it is properly declared in the monthly or quarterly return filed by the registered person.
• Input Tax Credit allowed only if reflected in GSTR-2B As per Rule 36(4) of the CGST Rules, input tax credit can be availed only in respect of those invoices or debit notes that are reported by the supplier in their GSTR-1 (or in IFF) and are duly reflected in the recipient’s GSTR-2B.
• ITC to be Claimed Within the Prescribed Time Limit As per Section 16(4) of the CGST Act, input tax credit is to be claimed earlier of the following:
  • 30^th November of the following financial year, or
  • The date of filing the annual return (Form GSTR-9) for the relevant financial year.

The recipient must furnish a return under Section 39 of the CGST Act. ITC cannot be claimed unless it is properly declared in the monthly or quarterly return filed by the registered person.

A registered person shall not be entitled to avail ITC if any of the prescribed conditions under the CGST Act and Rules are not fulfilled. In such cases, the authorities have initiated proceedings under Section 74 of the CGST Act, (pertaining to the period up to Financial Year 2023-24) which provides for the recovery of tax along with applicable interest and penalty in cases involving fraud, wilful misstatement, or suppression of facts and under Section 74A (for the period from Financial Year 2024–25 onwards) irrespective of the fact whether the case involves fraud, willful misstatement, or suppression of facts.

In cases where input tax credit is denied due to alleged non-compliance, it is crucial for the taxpayer to furnish sufficient documentary evidence to validate the genuineness of the transaction and the eligibility of the ITC claimed. Submitting proper records can help establish that all prescribed conditions were duly satisfied and that there was no element of fraud, wilful misstatement, or suppression of facts.

Documents to be Submitted in Response to Notice under Section 74 and 74A of CGST Act, 2017

When responding to notices under Section 74 and 74A of CGST Act, 2017, the following documents (non-exhaustive list) are crucial to substantiate the ITC claim:

1. Purchase Order A purchase order initiates the commercial transaction between the supplier and the recipient. It establishes the buyer’s intention to procure goods or services. It serves as a formal and documented agreement between the buyer and the supplier, which contains the quantity, value, delivery terms, and applicability of the Goods and Services Tax (GST). This document evidences the genuine nature of the procurement.
2. E-mail Communication E-mail communication related to procurement serves as a record of active and ongoing correspondence between the persons. It may cover essential aspects such as price negotiations, delivery schedules and follow-up discussions. This documented interaction supports the authenticity of the transaction by demonstrating a bona fide business relationship.
3. Invoice Copy An invoice copy is a prime tax document, evidencing the actual supply of goods or services. It contains all requisite particulars, including details of the supplier, recipient, taxable value, GSTIN, tax charged, place of supply and the nature of the supply. A valid tax invoice is a mandatory precondition for availing input tax credit.
4. Lorry Receipt / Consignment Note The Lorry Receipt (LR) or Consignment Note serves as conclusive evidence of the physical movement of goods from the supplier’s premises to the recipient’s location. Issued by the transporter, it contains details such as the name of the consignor and consignee, description and quantity of goods, vehicle number, and date of dispatch. It reinforces that the supply was not merely on paper but was executed in substance.
5. Goods Receipt Note The Goods Receipt Note (GRN) is an internal document generated by the recipient upon receipt of goods, confirming that the items dispatched by the supplier have been physically received at the recipient’s premises. It typically includes details such as quantity received, condition of goods, date of receipt, and reference to the corresponding purchase order and invoice. The GRN serves as a crucial link in the purchase cycle, affirming that the goods mentioned in the invoice were not only delivered but also verified and accepted by the recipient.
6. E-Way Bill The E-Way Bill is a mandatory compliance document under GST for the movement of goods exceeding a value of 50,000. It is electronically generated and contains details such as the invoice number, date, transporter information, vehicle number, consignor and consignee GSTINs, and value of goods. The presence of a valid E-Way Bill linked with the transaction provides evidence of the lawful and physical movement of goods. It supports both system-based validation and helps prevent fake invoicing practices.
7. Stock Register Showing Movement of Goods The Stock Register maintained by the recipient reflects inward and outward movement of goods and serves as an internal record of inventory levels. It includes item-wise opening balance, purchases (inward entries), consumption (internal transfer), sales (outward entries), and closing stock for a given period. This document becomes an important part of the evidence demonstrating that the transaction was not merely on paper but had a material impact on the business.
8. Bank Statement Showing Payment to Defaulting Supplier A Bank Statement evidencing payment made to the supplier demonstrates the genuineness of the transaction. It proves that the consideration for the supply, including the tax component, was actually paid by the recipient through banking channels. While the supplier’s failure to remit the tax to the government may trigger departmental scrutiny, the recipient has nevertheless fulfilled the statutory condition of making payment against a valid tax invoice.
9. Return Filing Status of Supplier from GST Portal The Return Filing Status of the Supplier, as downloaded from the GST portal, serves as evidence of the supplier’s compliance at the time of entering the transaction. This includes records of GSTR-1 and GSTR-3B filings, which indicate whether the supplier was actively filing returns under the GST law.
10. Extract from GSTR-2B An Extract from GSTR-2B acts as a system-generated proof of ITC eligibility. GSTR-2B is an auto-drafted ITC statement that reflects invoices uploaded by the supplier in their GSTR-1 or IFF (Invoice Furnishing Facility) for a specific tax period. The presence of the relevant invoice in the recipient’s GSTR-2B confirms that the supplier has disclosed the transaction to the GST system, which forms the basis for availing credit.
11. Ledger of Supplier from Books of Accounts The Supplier’s Ledger, as maintained in the recipient’s books of accounts, serves as an internal accounting evidence of the transaction. It captures all financial entries related to the supplier, including purchases, tax components, payments made, debit/credit notes issued, and closing balances. When the ledger aligns with the tax invoice, bank statement, GRN, and other related documents, it further reinforces the authenticity and completeness of the transaction.
12. Toll Tax Payment Proof (if available) Toll tax payment proof is an important supporting document that demonstrates the physical movement of goods via road transport during a commercial transaction. Such receipts or payment records can significantly strengthen the authenticity and genuineness of the supply.

In cases where the recipient possesses all valid documentation, has actually received the goods, and has fulfilled all conditions prescribed under Section 16 of the CGST Act, the recipient should not be penalized for any default or non-compliance on the part of the supplier.

In cases where the recipient possesses all valid documentation, has actually received the goods, and has fulfilled all conditions prescribed under Section 16 of the CGST Act, the recipient should not be penalized for any default or non-compliance on the part of the supplier.

Consequences of ITC Denial without Considering Genuineness of Transaction

• Genuineness of the Transaction The recipient should not be penalized for a genuine business transaction that is supported by proper documentation as mentioned above. Imposing penalties on recipients in such situations would unfairly burden businesses that have complied with the law in good faith and have engaged in legitimate transactions. The legal maxim “Lex Non Cogit ad Impossibilia” asserts that the law cannot force someone to perform an act that is beyond their ability to do. This principle was highlighted by Justice Owens in Hughey v. JMS Development, where he stated: “The law does not compel one to do the impossible. If a law imposes a tax that the person cannot fulfill due to circumstances beyond their control, and without fault on their part, the law will typically excuse them.”
• Principle of Substance Over Form The proper officer must focus on the substance of the transaction rather than the mere technicalities. If the recipient has received goods or services and paid for them, the transaction is legitimate, regardless of the supplier’s compliance.
• Significant Impact on Business Operations Blocking or reversal of ITC leads to significant cash flow disruption, as it directly increases the working capital requirement of the business. Denial or reversal of ITC due to the default of supplier results in an increased compliance burden for the recipient, requiring extensive documentation, reconciliations, and prolonged engagement with tax authorities to justify legitimate claims. Due to a supplier’s non-compliance, the supply chain can face significant disruption. Trust between recipients and suppliers is undermined, causing recipients to become hesitant in dealing with small, new, or less-established vendors due to concerns over ITC-related consequences. This approach often leads to sourcing delays, dealings with a limited pool of suppliers, reduced bargaining power, and increased procurement costs, ultimately affecting operational efficiency and overall competitiveness.

Fraudulent ITC claims can negatively affect a registered person’s reputation. Even if the registered person has complied with all legal requirements, they are still connected to transactions flagged as fraudulent, mainly due to issues with the supplier. It can raise concerns among customers, investors, and other stakeholders and harm the company’s overall image.

Relevant Case Law

In Himalaya Communication Pvt. Ltd. v. Union of India & Ors. [CWP No. 8809 of 2025 decided on June 06, 2025], the Hon’ble Himachal Pradesh High Court held that ITC cannot be denied exclusively on the ground of retrospective cancellation of the supplier’s GST registration.

Himalaya Communication Pvt. Ltd., the recipient of goods, had claimed ITC based on the tax paid to its supplier. However, the supplier’s GST registration was cancelled retroactively by the authorities. The Department had denied ITC to the recipient, arguing that since the supplier’s registration was cancelled, the transaction was considered invalid for ITC claims.

The Court emphasized that, as per Section 16(2) of the CGST Act, 2017, the authorities should consider the fact and genuineness of the transaction before proceeding to deny Input Tax Credit as the recipient has already paid tax to the supplier, and they have all relevant documents which are required for claiming the ITC and that the supplier has already discharged tax liability by filing of GSTR-3B. Accordingly, the High Court set aside the impugned order and remanded the matter to the Adjudicating Authority for fresh consideration in accordance with the law.

A similar view was taken by the Hon’ble Madras High Court in M/s. Engineering Tools Corporation v. The Assistant Commissioner [decided on February 15, 2024], wherein it was held that ITC cannot be denied merely due to retrospective cancellation of the supplier’s registration without examining the genuineness of the transaction and supporting evidence.

Conclusion

In response, registered persons are required to submit documentary evidence, including tax invoices, goods receipt notes, lorry receipts, e-way bills, bank statements, GSTR-2B extracts, and supplier ledger accounts, to substantiate the authenticity of the transaction. Encouragingly, courts have taken a supportive stance in many such cases, holding that ITC should not be denied merely due to retrospective cancellation of the supplier’s registration or procedural defaults beyond the recipient’s control, especially where the transaction is genuine and supported by appropriate documentation. Strong evidence and consistent court rulings uphold fair adjudication, affirming that the law does not expect the impossible.