The Delhi High Court has set aside an order confirming Input Tax Credit (ITC) demand of Rs. 3.34 crores, equivalent penalty, and interest of Rs. 50.30 lakhs, on the ground that the order did not disclose supplier names, GSTINs, invoice dates, cancellation dates, or supplier-wise ITC quantum. The Court held that invocation of Section 74 of the CGST Act requires specific findings on fraud, wilful misstatement, or suppression of facts, and that mere reproduction of statutory language or audit objections is insufficient to demonstrate application of mind.
The constitutional challenge to Section 16(2)(c) of the CGST Act was rejected, following the Supreme Court’s decision in Bhandari Scraps Traders v. Union of India [SLP (C) No. 23931/2026, decided on 24 July 2026] declining to interfere with the Gujarat High Court’s judgment in Maruti Enterprises v. Union of India [2026 SCC OnLine Gujarat 4013], which had upheld the provision. The Court also clarified that the affirmation of Section 16(2)(c) does not relieve the adjudicating authority from independently satisfying the statutory ingredients of Section 74 on the facts of each case, particularly where the demand rests on retrospective cancellation of supplier registrations.
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The Division Bench comprising Justice Anil Kshetarpal and Justice Bharat Parashar observed that the constitutional challenge to Section 16(2)(c) of the CGST Act no longer survived for consideration, since the Gujarat High Court in Maruti Enterprises v. Union of India [2026 SCC OnLine Gujarat 4013] had already upheld the provision, and the Supreme Court in Bhandari Scraps Traders v. Union of India [SLP (C) No. 23931/2026, decided on 24 July 2026] had declined to interfere with that judgment, noting the clear distinction between the Delhi VAT regime and the CGST regime, including the re-availment mechanism under Section 41 and Sections 73 and 74 of the CGST Act.
On the merits of the adjudication, the Court noted that Section 74 of the CGST Act is attracted only where tax has not been paid, short paid, or ITC has been wrongly availed by reason of fraud, wilful misstatement, or suppression of facts to evade tax, and that an order under Section 74 must therefore disclose the factual basis on which these ingredients are satisfied, with mere reproduction of statutory language being insufficient.
The Court found that paragraph 2.1 of the Impugned Order merely reproduced the audit objection in general terms, without disclosing the names of the suppliers, their GSTINs, the dates of the relevant invoices, the dates from which the registrations were cancelled, the supplier-wise quantum of ITC, or the material on which the cancellation dates were ascertained. The order also did not record any specific finding on how the Petitioner committed fraud, made a wilful misstatement, or suppressed facts with intent to evade tax, and did not deal with the Petitioner’s defence that the transactions were genuine and the suppliers were registered at the relevant point of time.
Briefly, Treco Wire India Private Limited, a manufacturer of copper wires registered under the Central Goods and Services Tax Act, 2017, was subjected to a GST audit covering the period from 1 July 2017 to 31 March 2021. Based on the audit, an Audit Memo dated 23 July 2023, alleged that the company had wrongly claimed input tax credit (ITC) of Rs. 3.34 crores on supplies received from suppliers whose GST registrations had been cancelled with retrospective effect, and a further Rs. 50.30 lakhs were proposed as interest for alleged delayed payment to suppliers beyond 180 days.
The Audit Report in FORM GST ADT-02 followed on 27 July 2023, after which a pre-show-cause intimation in FORM GST DRC-01A and a show-cause notice dated 22 September 2023 under Section 74 of the CGST Act were issued. The proceedings culminated in the Order-in-Original, which confirmed the ITC demand of Rs. 3.34 crores, an equivalent penalty, and interest of Rs. 50.30 lakhs under Section 50 of the CGST Act. The Petitioner challenged the order, the show-cause notice, and also sought to strike down or read down Section 16(2)(c) of the CGST Act and the proviso to Section 16(2) dealing with interest liability where payment to the supplier is made beyond 180 days.
