GST tribunal rules that ITC mismatches during audit do not automatically imply tax evasion

The Bengaluru GST Appellate Tribunal clarifies that discrepancies in input tax credit found during routine audits do not alone justify harsher penalties under Section 74 of the CGST Act, emphasizing the need for proof of fraud or suppression.

The GST Appellate Tribunal in Bengaluru has ruled that a mismatch in input tax credit found during a routine audit is not, by itself, enough to justify the harsher penalty provisions under Section 74 of the CGST Act. In a case involving Conduent Business Services India LLP, the tribunal said the tax department must show independent evidence of fraud, wilful misstatement or suppression of facts with intent to evade tax before invoking that section.

According to the tribunal, the dispute began with a Section 65 audit covering July 2017 to March 2020. Officers flagged three issues: excess credit claimed in GSTR-3B compared with GSTR-2A, ineligible input tax credit under Section 17(5), and irregular transitional credit claimed through TRAN-1. The audit objection totalled ₹19,28,456. Before a show-cause notice was issued, the company paid ₹7,78,693 in tax and ₹5,77,235 in interest on the liabilities it accepted.

The tribunal said that payment mattered. It held that where a taxpayer voluntarily clears tax and interest before a notice, and where the department has not independently established the elements needed for Section 74, the sums should be treated within the framework of Section 73(5) instead. It added that the mere fact that the discrepancies were discovered during audit does not prove deliberate concealment.

In reaching that view, the tribunal relied on recent Supreme Court guidance as well as earlier precedent, including Anand Nishikawa Co. Ltd. v. CCE. The court’s reasoning was that information already available in statutory filings such as GSTR-3B, GSTR-2A and TRAN-1 cannot later be portrayed as hidden simply because the department identified the issue during verification. The tribunal also rejected the suggestion that the contravention would have continued “but for the audit verification”, saying that approach misstated the legal test.

The bench also dismissed a preliminary objection that the first appellate process was tainted by institutional bias because the Revenue’s appeal had been authorised through a Commissioner’s review order. It said that such a review is an administrative step, not a judicial finding on the merits, and that the departmental structure alone does not create a real danger of bias. The tribunal therefore set aside the appellate order and held that the Section 74 penalties on two of the three issues could not stand.