Court Rules Independent Verification Suffices for Issuance of Show Cause Notice Under Section 74A of CGST Act, Dismissing Challenge by M/s Neelkanth Entrepreneurs Pvt. Ltd.
In a significant judgment delivered on September 9, 2026, the Allahabad High Court (Division Bench, Lucknow) in the case of M/s Neelkanth Entrepreneurs Private Limited v. State of U.P. upheld the issuance of a Show Cause Notice under Section 74A of the Central Goods and Services Tax (CGST) Act, 2017, even though the department had not initiated the statutory scrutiny under Section 61 of the Act.
The petitioner, a private limited company engaged in works-contract services for various public infrastructure projects, challenged the Show Cause Notice dated July 9, 2026, issued by the Deputy Commissioner, State Tax, Lucknow. The notice proposed denial of Input Tax Credit (ITC) availed by the petitioner, alleging that the subcontractors to whom the petitioner had subcontracted parts of the work were bogus and non-existent entities, thereby constituting wrongful availing of ITC.
The petitioner contended that all subcontractors were duly registered, active at the time of transactions, and had executed the works as evidenced by work orders, tax invoices, bank payments, GST returns, and undertakings. It further argued that the issuance of the Show Cause Notice without prior initiation of scrutiny proceedings under Section 61 and without affording an opportunity to explain the discrepancies was in violation of the statutory scheme and principles of natural justice.
However, the Court rejected these contentions, holding that Section 61, which empowers the proper officer to scrutinize returns and seek explanations in case of discrepancies, is a pre-adjudicatory mechanism and not a mandatory precondition for issuing a Show Cause Notice under Section 74A. The Court emphasized that Section 74A operates independently and may be invoked based on independent verification or other credible information revealing prima facie tax evasion, including fraud or wilful misstatements.
The Court observed that the Show Cause Notice specifically alleged fraudulent claims of ITC based on fictitious invoices from bogus subcontractors, thus attracting the stringent provisions of Section 74A(5)(ii). While the petitioner disputed these allegations, the Court noted that such factual disputes require adjudication and cannot be resolved in writ jurisdiction at the notice stage.
Further, the Court clarified that ordinarily, writ jurisdiction under Article 226 of the Constitution does not lie against the mere issuance of a Show Cause Notice unless it is wholly without jurisdiction or violates fundamental rights or principles of natural justice. Since the petitioner had not filed any reply to the Show Cause Notice and had alternative statutory remedies available, the Court declined to interfere at this preliminary stage.
The Court also referred to recent Supreme Court decisions affirming the constitutional validity of Section 16(2)(c) of the CGST Act, 2017, which mandates that ITC is only available if the supplier has paid the corresponding tax to the government. Consequently, the petitioner did not press for the declaration of unconstitutionality of this provision.
In conclusion, the Allahabad High Court dismissed the writ petition but permitted the petitioner to file a detailed reply to the Show Cause Notice within four weeks, directing the adjudicating authority to consider it on merits after an opportunity of hearing. The Court reserved all rights and contentions for adjudication by the statutory authority.
This judgment establishes that the GST department can issue Show Cause Notices under Section 74A based on independent verification and is not bound to first initiate scrutiny proceedings under Section 61. It also underscores the limited scope of judicial interference at the notice stage, thereby reinforcing procedural safeguards in GST adjudication without hampering the department's investigative powers.
Bottom Line:
GST Law - Issuance of Show Cause Notice under Section 74A of the CGST Act, 2017 without initiation of scrutiny under Section 61 is valid if independent verification reveals prima facie evasion of tax.
Statutory provision(s):
Central Goods and Services Tax Act, 2017 Sections 16(2)(c), 61, 73, 74A; CGST Rules 2017 Rule 99(1); Constitution of India Articles 14, 19(1)(g), 226, 300A
