Karnataka HC Sets Aside Trader’s ₹36.2 Lakh GST Demand: Notice Did Not Allege His Fraud, But Revenue May Resume From Reply Stage

The appellant, a GST-registered trader, claimed input tax credit (ITC) on purchases from M/s Laxmi Enterprises for FY 2019–20.

The tax authorities alleged that the supplier was involved in bill or circular trading and proposed to disallow ITC of ₹11,76,252 under Section 74 of the KGST/CGST Acts.

The appellant filed replies and supporting documents, including invoices and bank statements, and requested a personal hearing.

The adjudicating authority nevertheless confirmed the demand, interest and penalty, resulting in a total demand of ₹36,22,856.

The Single Judge declined to intervene, directing the appellant to pursue the statutory appeal under Section 107.

The appellant challenged that decision in this writ appeal.

Section 74 of the KGST/CGST Acts applies where tax has not been paid or ITC has been wrongly availed or utilised by reason of fraud, wilful misstatement or suppression of facts to evade tax; the show-cause notice must disclose the foundational facts supporting that allegation, and merely reciting statutory terms is insufficient.

The Court relied on GR Infra Projects Ltd. v. State of Madhya Pradesh, 2026 SCC OnLine SC 2084, and Tata Steel Ltd. v. Union of India, 2026 SCC OnLine SC 1702, for the rule that fraud or suppression cannot be supplied by later explanations or counter-affidavits where the notice itself lacks supporting particulars.

Although Section 107 provides a statutory appellate remedy, the Court considered intervention appropriate where the challenge went to the jurisdictional basis for invoking Section 74.

The notices principally alleged that the supplier was bogus or involved in bill or circular trading; they did not set out facts showing how the appellant itself had committed fraud, made a wilful misstatement or suppressed facts to evade tax.

Applying the Supreme Court’s guidance, the Court held that the notices’ general assertions did not establish the statutory basis for invoking Section 74.

It also noted that the appellant had submitted replies and documents, yet the proceedings recorded that no reply had been filed or failed to show that the material had been properly considered.

In those circumstances, the challenge was not one that should be left solely to the statutory appellate process.

The Order-in-Original dated 27 March 2026 was obliterated.

The Revenue was left at liberty, if permissible in law, to proceed from the stage of considering the appellant’s reply to the first show-cause notice dated 17 April 2023 and to take the matter to its logical conclusion.