Draft reply to Show Cause notice (SCN) under Section 74 of GST
Below is a detailed, paragraph-wise guide on the most important arguments that should be included in your reply.
1. Improper Invocation of Section 74 – Jurisdictional Error
Your reply should begin by questioning why Section 74 has been invoked
in the first place.
Section 74 can be applied only when the department clearly establishes:
- Fraud
- Willful
misstatement
- Suppression of
facts
- Intent to evade
tax
In many ITC-related SCNs, the notice merely refers to GSTR-2A/2B
mismatches, supplier non-payment, or data analytics reports. None of these,
by themselves, prove fraud or suppression on the part of the recipient.
If the SCN does not specifically explain how fraud or intent to evade tax is involved, then the invocation of Section 74 is legally flawed. In such cases, the notice should have been issued under Section 73, which applies to non-fraud cases. A notice issued under the wrong section is bad in law and liable to be dropped at the threshold itself.
2. No Fraud, Willful Misstatement, or Suppression by the Taxpayer
It is essential to clearly state that no element of fraud or
suppression exists in your case.
You should explain that:
- All
transactions were properly recorded in books of accounts
- ITC was claimed
transparently through regular GST returns
- No information
was hidden from the department at any stage
Suppression implies deliberate concealment, not mere omission or
mismatch. If all details were disclosed in returns, audits, or departmental
filings, there can be no allegation of suppression. A genuine
interpretation difference or clerical mismatch cannot be equated with fraud.
Courts have repeatedly held that intent to evade tax must be proven, not presumed.
3. ITC Cannot Be Denied Merely Due to Supplier Default
One of the most common grounds for ITC denial is that the supplier has
not paid tax or has not filed returns. Your reply must firmly counter this
approach.
As a recipient:
- You have no
legal control over the supplier’s tax compliance
- GST law does
not mandate monitoring the supplier’s tax payment status
- You have
already paid the invoice value along with GST to the supplier
Denying ITC solely because of supplier default effectively punishes the buyer for the fault of another taxpayer, which is neither fair nor legally sustainable. Courts have emphasized that a bona fide recipient should not suffer for supplier non-compliance, especially when all documentary conditions are fulfilled.
4. Doctrine of Bona Fide Purchaser Applies
A key principle to highlight is that of a bona fide purchaser.
You should clearly demonstrate that:
- Goods or
services were actually received
- The supplier
was registered at the time of transaction
- Tax invoices
were valid and compliant
- Payment was
made through banking channels
Once these conditions are met, the recipient becomes a bona fide
purchaser. Expecting such a buyer to ensure that the supplier files returns and
deposits tax would amount to demanding the impossible, which the law
does not require.
This principle has been upheld in multiple judicial decisions and should be clearly cited in the reply.
5. Burden of Proof Has Been Fully Discharged
Although GST law places the initial burden on the taxpayer to
prove eligibility of ITC, this burden is not endless.
Your reply should explain that you have already provided:
- Tax invoices
- E-way bills
- Goods receipt
notes
- Transport
documents
- Stock records
- Bank payment
proofs
- GSTR-2A / 2B
reconciliation
Once these documents are submitted, the burden shifts to the department to prove that the transaction is fake or fraudulent. Mere suspicion, assumptions, or third-party data analytics cannot override documentary evidence.
6. Mismatch Reports and Data Analytics Are Not Conclusive Proof
Many SCNs rely heavily on system-generated reports, such as
mismatch data or risk parameters.
You should clearly argue that:
- Such reports
are only starting points for inquiry
- They cannot be
treated as conclusive evidence
- ITC denial
cannot be based solely on automated alerts
Unless the department independently verifies and establishes that the transaction never occurred, ITC cannot be denied merely on the basis of data inconsistencies.
7. Violation of Principles of Natural Justice
If the SCN relies on:
- Third-party
statements
- Investigation
reports
- Supplier
statements
- Internal
departmental data
but does not provide copies of these documents, it amounts to violation
of natural justice.
A taxpayer has the right to:
- Know the
evidence against them
- Inspect
relied-upon documents
- Cross-examine
where statements are used
Any demand raised without granting these rights is procedurally invalid and liable to be set aside.
8. Double Taxation and Unjust Enrichment of the Government
Another critical argument is that denial of ITC leads to double
taxation.
- GST has already
been paid by you to the supplier
- Denial of ITC
means the tax amount becomes a cost
- The government
ends up retaining tax without granting credit
This goes against the fundamental design of GST as a value-added tax system, where tax should not cascade. Penalizing a compliant taxpayer in this manner leads to unjust enrichment of the exchequer, which courts have consistently disapproved.
9. Penalty and Extended Limitation Not Sustainable
Since Section 74 involves fraud allegations:
- Extended
limitation period cannot apply unless fraud is proven
- Mandatory
penalty under Section 74 cannot survive without intent to evade tax
If fraud itself fails, penalty automatically fails, and the entire proceeding collapses.
Final Conclusion
A reply to an SCN under Section 74 must be strategic, detailed, and
legally grounded. It should:
- First challenge
the incorrect invocation of Section 74
- Establish
absence of fraud or intent
- Prove bona fide
receipt of goods or services
- Demonstrate
full compliance through documents
- Highlight
procedural lapses and constitutional concerns
A strong, well-structured reply not only protects your ITC but also
strengthens your case at appellate levels if needed.